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

8791

A. Definition and Classification of Banks

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

Key Doctrine: Indeed, a bank has been defined as a moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal, in notes, bills of exchange,
and credits. An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. ... any person
engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised.

FACTS: The Security and Acceptance Corporation is a corporation registered with the Securities and Exchange Commission.

Armed with a search warrant, the intelligence division of the Central Bank and of the Manila Police Department searched the premises of the
corporation and seized documents and records thereof relative to its business operations. Upon examination and evaluation of said documents and records,
it was submitted that the corporation is performing banking functions without requisite certificate of authority from the Monetary Board of the Central
Bank, in violation of Secs. 2 and 6 of Republic Act 337, particularly, soliciting and accepting deposit from the public and lending out the funds so received. It was noted
that company's articles of incorporation authorize it only to engage primarily in financing agricultural, commercial and industrial projects, and secondarily,
in buying and selling stocks and bonds of any corporation, thus the corporation exceeded the scope of its powers and authority as granted under its charter.

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

The Monetary Board promulgated its Resolution No. 1095, declaring that the corporation is performing banking operations, without having first
complied with the provisions of Sections 2 and 6 of Republic Act No. 337. However, notwithstanding its notice of the said resolution, the corporation, as
well as the members of its Board of Directors and the officers of the corporation, have been and still are performing the functions and activities which had
been declared to constitute illegal banking operations. In fact, the corporation had established 74 branches in principal cities and towns throughout the
Philippines; and that through a systematic and vigorous campaign undertaken by the corporation, the same had managed to induce the public to open 59,463
savings deposit accounts with an aggregate deposit of P1,689,136.74.

Accordingly, on December 6, 1962, the Solicitor General commenced this quo warranto proceedings for the dissolution of the corporation, with a
prayer that, meanwhile, a writ of preliminary injunction be issued ex parte, enjoining the corporation and its branches, as well as its officers and agents, from
performing the banking operations complained of, and that a receiver be appointed pendente lite.

Defendant corporation admitted that it has not secured the requisite authority to engage in banking. However, defendants deny that its transactions
partake of the nature of banking operations.

ISSUE: Are the transactions made by the corporation partake of the nature of banking transactions, thus in violation of the General Banking
Act?

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

It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has
been defined as a moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal, in notes, bills of
exchange, and credits.

Moreover, it has been held that:

An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender
and borrower, is a bank.

... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business,
although but one of these functions is exercised.

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

B. Distinction of Banks from Quasi-Banks and Trust Entities

TEODORO BAÑAS, C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON vs. ASIA PACIFIC FINANCE CORPORATION
G.R. No. 128703, October 18, 2000

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What is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function of banking institutions.

In 1981 ASIA PACIFIC filed a complaint for a sum of money with prayer for a writ of replevin against Teodoro, C. G. Dizon and Cenen Dizon. Sometime
in 1980, Teodoro executed a Promissory Note in favor of C. G. Dizon whereby he promised to pay to the order of C. G. Dizon the sum of P390,000.00 in
installments. Later, C. G. Dizon endorsed with recourse the Promissory Note to ASIA PACIFIC, and to secure payment thereof, C. G. Dizon, through its
officers, Cenen, President, and Juliette Dizon, VP and Treasurer, executed a Deed of Chattel Mortgage covering (3) heavy equipment units of Bulldozer Crawler
Tractors in favor of ASIA PACIFIC. Moreover, Cenen executed a Continuing Undertaking wherein he bound himself to pay the obligation jointly and severally
with C. G. Dizon.

C. G. Dizon Construction defaulted in the payment of the installments, prompting ASIA PACIFIC to send a Statement of Account to Cenen. As the demand
was unheeded, ASIA PACIFIC sued Teodoro, C. G. Dizon and Cenen. While petitioners admitted the genuineness of the Promissory Note, the Deed of Chattel
Mortgage and the Continuing Undertaking, they nevertheless maintained that these documents were never intended by the parties to be legal, valid and binding
but a mere subterfuge to conceal the loan of P390,000.00 with usurious interests.
Petitioners claimed that since ASIA PACIFIC could not directly engage in banking business, it proposed to them a scheme wherein ASIA PACIFIC could
extend a loan to them without violating banking laws: first, Cenen would secure a promissory note from Teodoro Bañas with a face value of P390,000.00
payable in installments; second, ASIA PACIFIC would then make it appear that the P/N was sold to it by Cenen with the 14% usurious interest on the loan
or P54,000.00 discounted and collected in advance by ASIA PACIFIC; and, lastly, Cenen would provide sufficient collateral and execute a continuing
guaranty.

On 21 April 1981 the trial court issued a writ of replevin against C. G. Dizon for the surrender of the bulldozer crawler tractors. Only two (2) were actually
turned over by defendants which units were subsequently foreclosed by ASIA PACIFIC to satisfy the obligation. On 25 September 1992 the RTC ruled in
favor of ASIA PACIFIC holding the defendants jointly and severally liable for the unpaid balance of the obligation under the Promissory Note in the amount
of P87,637.50 at 14% interest p.a. The Court of Appeals affirmed in toto the decision of the trial court thus.

Issue: Did the disputed transaction between petitioners and ASIA PACIFIC violate banking laws, hence, null and void?

Held: Petitioners insist that ASIA PACIFIC was organized as an investment house which could not engage in the lending of funds obtained from the public
through receipt of deposits. We reject the argument. An investment company refers to any issuer which is or holds itself out as being engaged or proposes
to engage primarily in the business of investing, reinvesting or trading in securities. As defined in Sec. 2, par. (a), of the Revised Securities Act, securities "shall
include commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred
or in any manner conveyed to another with or without recourse, such as promissory notes " Clearly, the transaction between petitioners and respondent was one
involving not a loan but purchase of receivables at a discount, well within the purview of "investing, reinvesting or trading in securities" which an
investment company, like ASIA PACIFIC, is authorized to perform and does not constitute a violation of the General Banking Act.

Moreover, Sec. 2 of the General Banking Act provides in part – Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage
in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operations shall be
considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws (underscoring supplied).

Indubitably, what is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function
of banking institutions. But here, the funds supposedly "lent" to petitioners have not been shown to have been obtained from the public by way of deposits,
hence, the inapplicability of banking laws.
Petitioners' assertions were based mainly on the self-serving testimony of Cenen, and not on any other independent evidence. His testimony is not only
unconvincing, but also self-defeating in light of the documents presented by respondent, i.e., Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking,
the accuracy, correctness and due execution of which were admitted by petitioners. Oral evidence certainly cannot prevail over the written agreements of
the parties.

Finally, while we empathize with petitioners, we cannot close our eyes to the overriding considerations of the law on obligations and contracts which must
be upheld and honored at all times. Petitioners have undoubtedly benefited from the transaction; they cannot now be allowed to impugn its validity and
legality to escape the fulfillment of a valid and binding obligation.

FIRST PLANTERS PAWNSHOP, INC., Petitioner, v. COMMISSIONER OF INETRNAL REVENUE Respondent.


G.R. No. 174134, July 30, 2008, AUSTRIA-MARTINEZ, J.

Key Doctrine: It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that
of a financial intermediary in that its principal function is lending.

Facts: First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added tax imposed upon it by the Bureau of Internal Revenue (BIR) for the
year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code
(NIRC), as amended, and therefore not subject to value-added tax (VAT).

In a Pre-Assessment Notice petitioner was informed by the BIR that it has an existing tax deficiency on its VAT liabilities for the year 2000. The deficiency
assessment was at P541,102.79 for VAT Petitioner protested the assessment for lack of legal and factual bases. Petitioner subsequently received a Formal
Assessment Notice directing payment.

Petitioner sought reconsideration but this was denied by the CTA En Banc.

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Issue: Whether petitioner, engaged in pawnshop business, is liable to pay the deficiency assessment at P541,102.79 for VAT?

Ruling: No!

Prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Pawnshops were then treated as VAT-able enterprises
under the general classification of sale or exchange of services under Section 108(A) of the Tax Code of 1997, as amended. On February 16, 2004 R.A. No. 9238
took effect. R.A. No. 9238 finally classified pawnshops as Other Non-bank Financial Intermediaries.

The tax treatment of pawnshops as non-bank financial intermediaries is not without basis.

R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities engaged in the lending of funds obtained in the form of
deposits. R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng
Pilipinas in the classification of banks.

It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial
intermediary in that its principal function is lending.

That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are

under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank

Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, viz.:

4101Q.1 Financial Intermediaries


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Non-bank financial intermediaries shall include the following:
(1) A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as
investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker x x
x. (Emphasis supplied)

Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however,
with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law, then petitioner is
not liable for VAT during these tax years. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but
it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be.

C. Bank Powers and Liabilities

REGISTER of DEEDS OF MANILA, petitioner-appellee, vs.


CHINA BANKING CORPORATION, respondent-appellant.
G.R. No. L-11964, April 28, 1962, DIZON, J., EN BANC

Doctrine

Although Paragraph (c), Section 25 of Republic Act 337 allows a (foreign) commercial bank to purchase and hold such real estate as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings. However, the “debts” referred to in this provision are only those resulting from previous loans and other similar transactions made or
entered into by a commercial bank in the ordinary course of its business as such. Obviously, whatever “civil liability” arising from the criminal offense of qualified theft was admitted in
favor of appellant bank by its former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar transaction had between the two parties in the ordinary course of
banking business.

Facts

Court of First Instance of Manila (Criminal Case No. 22908) Alfonso Pangilinan and one Guillermo Chua were charged with qualified theft, the money
involved amounting to P275,000.00. Pangilinan and his wife, Belen Sta. Ana, executed a public instrument entitled DEED OF TRANSFER whereby, after
admitting his civil liability in favor of his employer, the China Banking Corporation, in relation to the offense aforesaid, he ceded and transferred to the
latter, in satisfaction thereof, a parcel of land located in the City of Manila, registered in the name of "Belen Sta. Ana, married to Alfonso Pangilinan.

The Deed of Transfer executed by Pangilinan was presented for registration but the register of deeds, after finding that China Banking Corporation, as an
alien-owned corporation, is barred from acquiring lands in the Philippines under Sec. 5, Art. XIII of the Constitution, submitted the matter to the Land
Registration Commission for resolution which, in turn, denied the registration.

The bank contended that Section 25 of Republic Act 337 allows a commercial bank to purchase and hold real estate to wit:

SEC. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes:

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(c) Such shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings;

(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it

Issue

whether appellant — an alien- owned bank — can acquire ownership of the residential lot covered by Transfer Certificate of Title No. 32230 by virtue of
the deed of transfer

Ruling

No. Chinabank is prohibited from holding lands by Sec. 5, Art. XIII of the Constitution. The reason for the prohibition is manifestly the desire and purpose
of the Constitution to place and keep in the hands of the people the ownership over private lands in order not to endanger the integrity of the nation.

We find that the case before Us does not fall under anyone of them.

Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to purchase and hold such real estate as shall be conveyed to it in satisfaction of
debts previously contracted in the course of its dealings, We deem it quite clear and free from doubt that the "debts" referred to in this provision are only those
resulting from previous loans and other similar transactions made or entered into by a commercial bank in the ordinary course of its business as such.
Obviously, whatever "civil liability" — arising from the criminal offense of qualified theft — was admitted in favor of appellant bank by its former employee,
Alfonso Pangilinan, was not a debt resulting from a loan or a similar transaction had between the two parties in the ordinary course of banking business.

Neither do the provisions of paragraph (d) of the Same section apply to the present case because the deed of transfer in question can in no sense be
considered as a sale made by virtue of a judgment, decree, mortgage, or trust deed held by appellant bank. In the same manner it cannot be said that the real
property in question was purchased by appellant "to secure debts due to it", considering that, as stated heretofore, the term debt employed in the pertinent
legal provision can logically refer only to such debts as may become payable to appellant bank as a result of a banking transaction.

That the constitutional prohibition under consideration has for its purpose the preservation of the patrimony of the nation cannot be denied, but appellant
and the amici curiae claim that it should be liberally construed so that the prohibition be limited to the permanent acquisition of real estate by aliens — whether
natural or juridical persons. This, of course, would make legal the ownership acquired by appellant bank by virtue of the deed of transfer mentioned
heretofore, subject to its obligation to dispose of it in accordance with law, within 5 years from the date of its acquisition. We cannot give assent to this
contention, in view of the fact that the constitutional prohibition in question is absolute in terms.

BANCO DE ORO-EPCI, INC., Petitioner vs. JAPRL DEVELOPMENT CORPORATION, RAPID FORMING CORPORATION and JOSE
U. AROLLADO, Respondents.
G.R. No. 179901, April 14, 2008, CORONA, J.

Key Doctrine: Banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud.

Facts:

Petitioner Banco de Oro-EPCI, Inc. extended credit facilities to JAPRL Development Corporation (JAPRL) amounting to P230,000,000 after
evaluating the latter’s financial statements for fiscal years 1998, 1999 and 2000. Respondents Rapid Forming Corporation (RFC) and Jose Arollado acted as
JAPRLs sureties. Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after the approval of its loan.
BDO- EPCI later learned from MRM Management, JAPRLs financial adviser, that JAPRL had altered and falsified its financial statements. It allegedly
bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment. The information alarmed
petitioner. Citing relevant provisions of the Trust Receipt Agreement, it demanded immediate payment of JAPRLs outstanding obligations amounting to
P194,493,388.98.

JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City and disclosed that it had been
experiencing a decline in sales for the three preceding years and a staggering loss in 2002. As the petition was sufficient in form and substance, a stay order
was issued. However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC.

Petitioner BDO-EPCI filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against
respondents in Makati RTC since JAPRL is ignoring its demand for payment. BDO-EPCI asserted that JAPRL was guilty of fraud because it (JAPRL) altered
and falsified its financial statements. The Makati RTC subsequently denied the application (for the issuance of a writ of preliminary attachment) for lack of
merit as petitioner was unable to substantiate its allegations. Nevertheless, it ordered the service of summons on respondents. Respondents moved to dismiss
the complaint due to an allegedly invalid service of summons. Because the officers return stated that an administrative assistant had received the summons,
JAPRL and RFC argued that Section 11, Rule 14 of the Rules of Court contained an exclusive list of persons on whom summons against a corporation must
be served. An administrative assistant was not one of them. Arollado, on the other hand, cited Section 6, Rule 14 thereof which mandated personal service
of summons on an individual defendant. Makati RTC noted that because corporate officers are often busy, summonses to corporations are usually received
only by administrative assistants or secretaries of corporate officers in the regular course of business. Hence, it denied the motion for lack of merit.

JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba RTC). Finding JAPRLs
petition sufficient in form and in substance, the Calamba RTC issued a stay order. respondents hastily moved to suspend the proceedings in Civil Case No.

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03 -991 pending in the Makati RTC. Makati RTC granted the motion with regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that,
because he was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should continue. Respondents moved for reconsideration but
it was denied. CA granted the petition and held that because the summonses were served on a mere administrative assistant, the Makati RTC never acquired
jurisdiction over respondents. Respondents filed a petition for certiorari in the CA and asserted that the Makati RTC committed grave abuse of discretion
as it did not acquire jurisdiction over their persons due to defective service of summons. Thus, the Makati RTC could not hear the complaint for sum of
money.

BDO-EPCI asserts that respondents maliciously evaded the service of summonses to prevent the Makati RTC from acquiring jurisdiction over
their persons. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid the payment of their
obligations. Petitioner moved for reconsideration but it was denied. Hence, this petition.

Issue:
Whether or not the bank (BPO-EPCI) may demand the immediate payment of JAPRL’s outstanding obligations.

Ruling:

YES.

When respondents moved for the suspension of proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis of the March 13, 2006
order of the Calamba RTC), they waived whatever defect there was in the service of summons and were deemed to have submitted themselves voluntarily
to the jurisdiction of the Makati RTC. Under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against
the corporation seeking rehabilitation from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings. The
Makati RTC may proceed to hear Civil Case No. 03- 991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed).
A creditor can demand payment from the surety solidarily liable with the corporation
seeking rehabilitation.

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their
legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved,
respondents utterly disregarded the significance of a stable and efficient banking system to the national economy.

Banks are entities engaged in the lending of funds obtained through deposits from the public. They borrow the public’s excess money
(i.e.,deposits) and lend out the same. Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments. Banks
operate (and earn income) by extending credit facilities financed primarily by deposits from the public. They plough back the bulk of said deposits into the
economy in the form of loans. Since banks deal with the public’s money, their viability depends largely on their ability to return those deposits on demand.
For this reason, banking is undeniably imbued with public interest.

Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual
borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to
pay the same.

In this case, petitioner BDO-EPCI alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities.
Considering the amount of petitioner’s exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed
committed fraud in securing the credit accommodation.

The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of
fraud.
Meanwhile, the Makati RTC should proceed to hear respondents guided by Section 40 of the General Banking Law

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Civil Case No. 03-991 against the three which states:
Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a
bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the
bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation
purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail,
the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the
right to demand immediate repayment or liquidation of the obligation.

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

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

Games and Garments Developers, Inc., petitioner vs.


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

Key Doctrine: Section 74 of the General Banking Act, as amended, proscribes banks from entering into “any contract of guaranty or suretyship” without providing
definitions of such contracts.

Spouses Bienvenida and Benedicto Pantaleon agreed to purchase a parcel of land located at Bayanan, Muntinlupa, owned by petitioner, Games and Garments
Developers, Inc. (GGDI) for the sums of
P14,000,000.00 payable to GGDI,
P4,000,000.00 payable to the Cosay Family, and
P1,000,000.00 as attorney’s fees payable to GGDI VP-Legal and counsel Atty. Cesar M. Lao (Lao).
The parties executed a Memorandum of Agreement (MOA) dated August 22, 1996, specifying the terms by which the payment will be satisfied.

On August 22, 1996, Mercado, Branch Manager of Allied Bank- Pasong Tamo, issued a letter addressed to Atty. Lao of GGDI and with Bienvenida’s
conforme, printed on the letterhead of Allied Bank, which reads:
This is with reference to the real property located at National Road, Bayanan, Muntinlupa City[,] a lot covered by Transfer
Certificate of Title (TCT) No. 205965.
Please be advised that Bienvenida Pantaleon/Sucat Import/Export who is purchasing the above-mentioned property has an approved real
estate loan with us in the amount of PESOS: ELEVEN MILLION ONLY (P11,000,000.00), the portion of the proceeds of which shall be
used to partially liquidate the account with you. Succeeding releases which is secured by the subject property will be made payable to Games
and Garments Developers, Inc.
After said Transfer Certificate of Title (TCT) covering said property is already transferred in our client’s name, our mortgage duly
annotated thereon, we guarantee to pay directly to you the amount of PESOS: EIGHT MILLION THREE HUNDRED SIXTY
THOUSAND ONLY (P8,360,000.00) ninety days from August 23, 1996 or on or before November 21, 1996.
It is understood that this guaranty is irrevocable.

On August 23, 1996 GGDI, through its President Sunder Hemandas, executed a Deed of Sale in favor of the Spouses Pantaleon. However, in the Deed the
amount of purchase price for the subject property was reduced to P11,000,000.00.

On the same day the Deed was executed, RD of Makati cancelled the TCT in the name of GGDI and issued another in the name of Bienvenida, married to
Benedicto Pantaleon. The notice of lis pendens (concerning the civil case of the Cosay family against GGDI) was also cancelled and a Real Estate Mortgage
in favor of Allied Bank was annotated to the TCT issued to Bienvenida.

Despite Mercado’s letter dated August 22, 1996, and unbeknownst to GGDI, Allied Bank already released the proceeds of the approved loan to the spouses
Pantaleon on August 23, 1996.

In a letter dated November 21, 1996 to Allied Bank, thru Mercado, Atty. Lao requested for the immediate payment of the balance of the purchase price
amounting to P8,360,000.00 considering that the guaranty executed by the bank in favor of GGDI was irrevocable and the TCT for the subject property
was already transferred in Bienvenida’s name. There being no action on his previous letter, Atty. Lao wrote another letter dated December 11, 1996 to Allied
Bank, thru Mercado, to follow-up on the request for payment.

Bienvenida, in a letter dated January 6, 1997, offered to pay GGDI P1,000,000.00 on or before January 24, 1997 and the balance of P7,360,000.00 plus
interest on March 28, 1997. GGDI received the P1,000,000.00 partial payment from Bienvenida via two checks dated January 17, 1997 and January 24, 1997
for the amount of P500,000.00 each. Bienvenida then issued two Allied Bank postdated checks for March 28, 1997 for the amounts of P7,360,000.00 and
P442,340.00, to cover the balance of the purchase price for the subject property and interest, respectively.

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Mercado executed another letter dated January 27, 1997 addressed to Atty. Lao, similarly worded as his letter dated August 22, 1996, except for the
penultimate paragraph which states that “we guarantee to pay directly to you the amount of PESOS: SEVEN MILLION EIGHT HUNDRED TWO
THOUSAND THREE HUNDRED FORTY (P7,802,340.00) sixty days from January 27, 1997 or on or before March 28, 1997.”

When GGDI deposited the two Allied Bank checks dated March 28, 1997 issued by Bienvenida, said checks were dishonored for being “Drawn Against
Insufficient Funds.”

Atty. Lao sent a letter dated August 15, 1997 to the Head Office of Allied Bank in Makati City, copy furnished Mercado, referring to Mercado’s letter of
guaranty dated January 27, 1997 and making a final request for payment of the sum of P7,802,340.00 within seven days from receipt of the current letter.

Hemandas, President of GGDI, sent a fax letter to Aida T. Yu, Vice President of Allied Bank, also requesting payment based on Mercado’s letter of guaranty,
in response the bank said,
We asked Mr. Mercado about this and he said that this letter [dated January 27, 1997] was not really intended as a [guaranty] for anything
but was an accommodation to a request of Atty. Cesar Lao, the Vice President of Games and Garments Developers, Inc. He even
emphasized to Atty. Lao that he was not authorized to issue such [guaranty] inasmuch as banks are not allowed to do so under the
General Banking Act.

Thus GGDI filed On April 15, 1998, GGDI filed before the RTC a Complaint for Breach of Contract (Rescission) and Damages with prayer for
Preliminary Attachment against the spouses Pantaleon, Mercado, and Allied Bank.

RTC ruled in favor of GGDI. On Appeal, CA modified the decision of RTC, absolving Allied Bank.

Issue: Whether or not Allied Bank is bound by the letter of Guaranty executed by Mercado.

Ruling: Yes.

The letters executed by Mercado are not contracts of guaranty covered by the prohibition in the General Banking Act, as amended.

It is undisputed that Mercado wrote two “letters of guaranty” dated August 22, 1996 and January 27, 1997. Although Mercado’s letters used the
words “guarantee” and “guaranty,” the same do not constitute contracts of guaranty covered by the prohibition under Section 74 of the General
Banking Act, as amended. Section 74 of the General Banking Act, as amended, proscribes banks from entering into “any contract of guaranty or
suretyship” without providing definitions of such contracts. Consequently, we rely on the general definitions of contracts of guaranty and suretyship
under Article 2047 of the Civil Code:
ART. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.

There was no express undertaking in Mercado’s letters dated August 22, 1996 and January 27, 1997 to pay Bienvenida’s debt to GGDI in case Bienvenida
failed to do so. In said letters, Mercado merely acknowledged that Bienvenida and/or her company had an approved real estate loan with Allied Bank and
guaranteed that subsequent releases from the loan would be made directly to GGDI provided that the certificate of title over the subject property would be
transferred to Bienvenida’s name and the real estate mortgage constituted on the subject property in favor of Allied Bank would be annotated on the said
certificate. Mercado, by the plain language of his letters, merely committed to the manner by which the proceeds of Bienvenida’s approved loan from Allied
Bank would be released, but did not obligate Allied Bank to be answerable with its own money to GGDI should Bienvenida default on the payment of the
purchase price for the subject property.

For this reason, Mercado’s letters may not be deemed as contracts of guaranty, although they may be binding as innominate contracts. The rule is settled
that a contract constitutes the law between the parties who are bound by its stipulations which, when couched in clear and plain language, should be applied
according to their literal tenor.

We cannot supply material stipulations, read into the contract words it does not contain or, for that matter, read into it any other intention that would
contradict its plain import. Neither can we rewrite contracts because they operate harshly or inequitably as to one of the parties, or alter them for the benefit
of one party and to the detriment of the other, or by construction, relieve one of the parties from the terms which he voluntarily consented to, or impose
on him those which he did not.
Other rulings:
1. Based on the doctrine of apparent authority, Allied Bank is bound by the undertaking in the letters dated August 22, 1996 and January 27, 1997
executed by Mercado as Branch Manager of Allied Bank- Pasong Tamo.
2. For its failure to comply with its undertaking under the letters dated August 22, 1996 and January 27, 1997, Allied Bank is liable to GGDI for
temperate/moderate, exemplary/corrective damages, and attorney’s fees.
3. Allied Bank is a mortgagee in bad faith and the foreclosure on the real estate mortgage and public auction sale of the subject property are null and
void.

D. Banking and Incidental Powers

SPOUSES RAUL and AMALIA PANLILIO v. CITIBANK, N.A.


G.R. No. 156335 November 28, 2007 AUSTRIA-MARTINEZ, J.

7
Investment management activities may be exercised by a banking institution. The investment is not a deposit and is not guaranteed by respondent. Absent any fraud or bad
faith, the recourse of petitioners in the LTCP is solely against the issuer, C&P Homes, and only upon maturity.

Facts:
Petitioner Amalia Panlilio (Amalia) phoned Citibank saying she wanted to place an investment, for three million pesos (PhP3 million). She spoke
with Jinky Lee, the bank employee, who introduced her to Citibank's various investment offerings. During the visit, Amalia instructed Lee on what to do
with the PhP3 million. Later, she learned that out of the said amount, PhP2,134,635.87 was placed by Citibank in a Long-Term Commercial Paper (LTCP),
a debt instrument that paid a high interest, issued by the corporation Camella and PalmeraHomes (C&P Homes). The rest of the money was placed in two
PRPN accounts, in trust for each of Amalia's two children.

Following this investment, respondent claims to have regularly sent confirmations of investment (COIs) to petitioners. ] Amalia claims to have
called Lee as soon as she received the first COI in December 1997, and demanded that the investment in LTCP be withdrawn and placed in a PRPN.
Respondent, however, denies this, claiming that Amalia merely called to clarify provisions in the COI and did not demand a withdrawal
Petitioner then met with respondent's other employee, Lizza Colet, to preterminate the LTCP and their other investments. Petitioners were told
that as to the LTCP, liquidation could be made only if there is a willing buyer, a prospect which could be difficult at that time because of the economic crisis.

Amalia, through counsel, sent her first formal, written demand to respondent for a withdrawal of her investment as soon as possible. In reply,
respondent wrote a letter stating that despite efforts to sell the LTCP, no willing buyers were found and that even if a buyer would come later, the price
would be lower than Amalia's original investment.

Thus, petitioners filed with the RTC their complaint against respondent for a sum of money and damages.

The RTC upheld all the allegations of petitioners and concluded that Amalia never instructed Citibank to invest the money in an LTCP. Thus, the
RTC found Citibank in violation of its contractual and fiduciary duties and held it liable to return the money invested by petitioners plus damages.

The CA held that with respect to the amount of PhP2,134,635.87, the account opened by Amalia was an investment management account; as a
result, the money invested was the sole and exclusive obligation of C&P Homes, the issuer of the LTCP, and was not guaranteed or insured by herein
respondent Citibank; that Amalia opened such an account as evidenced by the documents she executed with Citibank.

ISSUE:
Whether the transaction can be legally exercised by a Bank?
Whether petitioners are entitled to take back the money they invested from respondent bank?

The transaction is perfectly legal, as investment management activities may be exercised by a banking institution, pursuant to Republic Act No. 337 or the
General Banking Act of 1948, as amended, which was the law then in effect. Section 72 of said Act provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan
associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such
effects;
(b) Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences
of indebtedness and all types of
securities;
(c) Make collections and payments for the account of others and perform such other services for their customers as are not
incompatible with banking business.
(d) Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment
management/ advisory/consultancy accounts.

The banks shall perform the services permitted under subsections (a), (b) and
(c) of this section as depositories or as agents. Accordingly, they shall keep the funds, securities and other effects which they
thus receive duly separated and apart from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this section in order to insure that said operations do not endanger the
interests of the depositors and other creditors of the banks. (Emphasis supplied.)

while Section 74 prohibits banks from guaranteeing obligations of any person, thus:

Sec. 74. No bank or banking institution shall enter, directly, or indirectly into any contract of guaranty or suretyship, or shall
guarantee the interest or principal of any obligation of any person, copartnership, association, corporation or other entity.
The provisions of this section shall, however, not apply to the following: (a) borrowing of money by banking institution through the
rediscounting of receivables; (b) acceptance of drafts or bills of exchange (c) certification of checks; (d) transactions involving the release
of documents attached to items received for collection; (e) letters of credit transaction, including stand-by arrangements; (f) repurchase
agreements; (g) shipside bonds; (h) ordinary guarantees or indorsements in favor of foreign creditors where the principal obligation
involves loans and credits extended directly by foreign investment purposes; and (i) other transactions which the Monetary Board may,
by regulation, define or specify as not covered by the prohibition. (Emphasis supplied.)

8
Nothing also taints the legality of the LTCP bought in behalf of petitioners. C&P Homes' LTCP was duly registered with the Securities and Exchange
Commission while the issuer was accredited by the Philippine Trust Committee.

Petitioners may not seek a return of their investment directly from respondent at or prior to maturity. As earlier explained, the investment is not a deposit
and is not guaranteed by respondent. Absent any fraud or bad faith, the recourse of petitioners in the LTCP is solely against the issuer, C&P Homes, and
only upon maturity.

It is clear that since the money is committed to C&P Homes via LTCP for five years, or until 2003, petitioners may not seek its recovery from respondent
prior to the lapse of this period. Petitioners must wait and meanwhile just be content with receiving their interest regularly. If petitioners want the immediate
return of their investment before the maturity date, their only way is to find a willing buyer to purchase the LTCP at an agreed price, or to go directly against
the issuer C&P Homes, not against the respondent.

E. Diligence Required of Banks

SIMEX INTERNATIONAL (MANILA), INCORPORATED v. THE HONORABLE COURT OF APPEALS and TRADERS ROYAL
BANK
G.R. No. 88013, March 19, 1990, CRUZ J.

KEY DOCTRINE: 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 point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship.

The petitioner SIMEX was a depositor of the respondent bank TRADERS ROYAL BANK and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. SIMEX deposited to its account in the said bank the amount of P100,000.00. Subsequently, SIMEX issued several
checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds.

As a consequence, the California Manufacturing Corporation sent, a letter of demand to SIMEX, threatening prosecution if the dishonored check
issued to it was not made good. It also withheld delivery of the order made by SIMEX. Similar letters were sent to SIMEX by the Malabon Long Life Trading
and by the G. and U. Enterprises.

SIMEX complained to TRADERS ROYAL BANK on June 10, 1981. Investigation disclosed that the sum of P100,000.00 deposited by SIMEX
on May 25, 1981, had not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited.

SIMEX demanded reparation from TRADERS ROYAL BANK for its "gross and wanton negligence." This demand was not met. SIMEX then
filed a complaint in the then Court of First Instance of Rizal claiming from TRADERS ROYAL BANK moral damages in the sum of P1,000,000.00 and
exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.

ISSUE: Whether or not TRADERS ROYAL BANK is liable for damages

RULING: YES.

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

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

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

TRADERS ROYAL BANK is ordered to pay SIMEX, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary
damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs.

9
Sia vs. Court of Appeals
G.R. No. 102970, May 13, 1993, DAVIDE, JR., J.

Contract for the use of safety deposit box is a special kind of deposit and the relationship between the parties thereto, with respect to the contents of the box, is that of a bailor and bailee,
the bailment being for hire and mutual benefit.

Conditions in a “Lease Agreement” covering a safety deposit box which exempt the bank from any liability for damage, loss or destruction of the contents thereof arising from its own
or its agent’s fraud, negligence or delay are considered null and void, for being contrary to law and public policy.

Although flooding could be considered a fortuitous event, failure of the bank to give notice to the renter of such fact makes it liable for damages, its negligence caused to aggravate injury
or damage to the renter

Facts:

This is an action for damages arising out of the destruction or loss of the stamp collection of the plaintiff LUZAN SIA (petitioner herein) contained in Safety
Deposit Box No. 54 which had been rented from the defendant SECURITY BANK AND TRUST COMPANY (SBTC) pursuant to a contract denominated
as a Lease Agreement.

The plaintiff rented the Safety Deposit Box No. 54 of the defendant bank at its Binondo Branch located at the wherein he placed his collection of stamps.
The said safety deposit box leased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes of the defendant bank at its aforesaid
Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank’s premises, seeped into the safety deposit box leased by the
plaintiff and caused, according to the plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff’s claim for compensation for his
damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank.

The defendant bank also contended

1. that its contract with the plaintiff over safety deposit box No. 54 was one of lease and not of deposit and, therefore, governed by the lease agreement
which should be the applicable law;
2. that the destruction of the plaintiff’s stamps collection was due to a calamity beyond its control; and
3. that there was no obligation on its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo branch which allegedly seeped into
the safety deposit box leased to the plaintiff.

The defendant also invokes the following provisions in the Lease Agreement of the safety box:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in connection therewith.

The trial court ruled in favour of SIA but this was reversed on appeal to CA.

Issue:

Whether or not the contract between SIA and SBTC is one of lease which would exculpate SBTC from liability on account of damage to stamps collection
deposited in its safety deposit box.

Ruling:
In the case of CA Agro-Industrial Development Corp. vs. Court of Appeals, this Court explicitly rejected the contention that a contract for the use of a
safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did we fully subscribe to the view that it is a contract of
deposit to be strictly governed by the Civil Code provision on deposit; it is, as we declared, a special kind of deposit.

Furthermore, Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides:
SEC. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan
associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects.
xxx
The banks shall perform the services permitted under subsections (a), (b), and (c) of this section as depositories or as agents.

Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the
agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed
[Art. 1173, id.]. Hence, any stipulation exempting the depositary from any liability, arising from the loss of the thing deposited on account of fraud, negligence
or delay would be void for being contrary to law and public policy and as such, provisions #13 and 14 in the lease agreement of safety deposit box being
invoked by SBTC are void. Furthermore, said provisions are inconsis tent with the respondent Bank’s responsibility as a depositary under Section 72(a) of
the General Banking Act.

As to liability of SBTC, although flooding could be considered a fortuitous event, failure of the bank to give notice to the renter of such fact makes it liable
for damages, its negligence caused to aggravate injury or damage to the renter. SBTC was aware of the floods of 1985 and 1986; it also knew that the
floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order

10
that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the
reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss.

REYES VS. COURT OF APPEALS


G.R. No. 118492. August 15, 2001, DE LEON, JR., J.:

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; The same higher
degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

Facts:

In view of the 20th Asian Racing Conference then scheduled to be held in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four
(4) delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent
Godofredo Reyes, the club’s chief cashier, to the respondent bank FAR EAST BANK AND TRUST COMPANY to apply for a foreign exchange demand
draft for One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of Sydney,
Australia.

The respondent bankat first denied the application for the reason that it did not have an Australian dollar account in any bank in Sydney. Godofredo asked
if there could be a way for respondent bank to accommodate PRCI’s urgent need to remit Australian dollars to Sydney. Respondent bank then informed
Godofredo of a roundabout way of effecting the requested remittance to Sydney thus:

1. the respondent bank would draw a demand draft against Westpac Bank in demand draft against Westpac Bank in Sydney, Australia (Westpac-
Sydney for brevity) and
2. have the latter reimburse itself from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A (Westpac- New York for
brevity).

PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement. The respondent bank approved the said application of
PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian Dollars
(AU$1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the
drawee bank.

Upon due presentment of the foreign exchange demand draft, denominated as FXDD No. 209968, the same was dishonored, with the notice of dishonour
stating the following: “x x x No account held with Westpac.” On In response to PRCI’s complaint about the dishonor of the said 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 bank’s dollar account in Westpac-New York. The respondent bank on the same day likewise
informed Westpac-New York 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
dollar account with the drawee Westpac- Sydney.

Upon arrival of the petitioners in Australia to attend the racing conference, they were denied registration in front of other delegates because the foreign
exchange demand draft for his registration fee had been dishonored for the second time.

The petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint for damages, docketed as Civil Case No. 88-2468, against the
respondent 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 exposed to unnecessary shock, social humiliation, and deep mental anguish in a foreign country, and in the
presence of an international audience.

Both the trial court and court of appeals dismiss the claim for damages in favour of the respondent bank. In so ruling, CA said that the standard of diligence
for the transaction under consideration is that of an “ordinary prudent person” and that there is no basis to hold the respondent bank liable for damages for
the reason that it exerted every effort for the subject foreign exchange effort for the subject foreign exchange demand draft to be honored.

Issue:

Whether or not respondent bank should be held liable for damages.

Ruling:

The facts as found by the courts a quo show that respondent bank did not cause an erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the
erroneous decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange demand draft.
Westpac- Sydney construed the said cable message as a format for a letter of credit, and not for a demand draft.

The evidence also shows that the respondent bank exercised that degree of 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 Westpac-New York to honor the reimbursement claim of
Westpac-Sydney and to debit the dollar account 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 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.

In Philippine Bank of Commerce v. Court of Appeals 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

11
capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary relationship with their depositors.

Considering the foregoing, the respondent bank was not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of the subject foreign
exchange demand draft. The case at bar does not involve the handling of petitioners’ deposit, 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 demand draft, and PRCI as the buyer of the same,
with the 20th Asian Racing Conference Secretariat in Sydney, Australia as the payee thereof.

The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the subject foreign exchange demand draft. The
erroneous reading of its cable message to Westpac-Sydney by an employee of the latter could not have been foreseen by the respondent bank. 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 of Appeals did not commit any reversible error.

PHILIPPINE SAVINGS BANK v. CHOWKING FOOD CORPORATION


G.R. No. 177526 | JULY 4, 2008 | REYES, R.T., J. | THIRD DIVISION

The banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence
required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected.
The General banking Law of 2000 requires of banks the highest standards of integrity and performance. Needless to say, a bank is “under obligation to treat the accounts of its
depositors with meticulous care.” The fiduciary nature of the relationship between the bank and the depositors must always be of paramount concern.

Facts
Joe Kuan Food Coporation issued in favor of Chowking five (5) PSBank checks. The total amount of the subject checks reached P556,981.86.

Chowking’s acting accounting manager, Rino T. Manzano, endorsed and encashed said checks with the Bustos branch of PSBank. All five checks
were honored by Santos, the branch head, even with only the endorsement of Manzano approving them. The signatures of the other authorized officers of
Chowking were absent, contrary to usual banking practice. Unexpectedly, Manzano absconded with and misappropriated the check proceeds.

When Chowking found out Manzano scheme, it demanded reimbursement from PSBank. When PSBank refused to pay, Chowking filed a
complaint for a sum of money with damages before RTC.

PSBank denied liability for the encashed checks and maintained that it exercised due diligence in the supervision of all its employees. It even
dismissed Santos after she was found guilty of negligence in the performance of her duties. It also averred that Chowking is stopped from claiming
reimbursement and damages since it was negligent in allowing Manzano to take hold, endorse, and encash its checks. It pointed out that the proximate cause
of Chowking’s loss was its own negligence.

RTC rendered judgment in favor of Chowking. PSBank then filed a motion for reconsideration and RTC reversed its earlier ruling and held that
it was Chowking’s own negligence that was the proximate cause of the loss.

The CA set aside the order of RTC and held that both PSBank and Santos should bear the loss.

Issue
WON PSBank observed the due diligence required of banks under the law.

Ruling
NO. PSBank failed to prove that it has observed the due diligence required of banks under the law.

It cannot be over emphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence
of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of
a family. The highest degree of diligence is expected.

In its declaration of policy, the General Banking Law of 2000 requires of banks the highest standards of integrity and performance. Needless to
say, a bank is “under obligation to treat the accounts of its depositors with meticulous care.” The fiduciary nature of the relationship between the bank and
the depositors must always be of paramount concern.
PSBank, through Santos, was clearly negligent when it honored Chowking’s checks with the lone endorsement of Manzano. The proximate cause
of the loss is not Chowking’s alleged negligence in allowing Manzano to take hold and encash Chowking’s checks. The proximate cause id PSBank’s own
negligence in the supervision of its employees when it overlooked the irregular practice of encashing checks without the requisite endorsements.

In BPI v. Casa Montessori Internationale, the Court similarly held:


“pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on checks being encashed, BPI is “expected to use reasonable business
prudence.” In the performance of that obligation, it is bound by its internal banking rules and regulation that form part of the contract it enters into with its depositors.

Unfortunately, it failed in that regard. Without exercising the required prudence on its part, BPI accepted and encashed the checks presented to it. As a result, it proximately
contributed to the fraud and should be held primarily liable for the negligence of its officers or agents when acting within the course and scope of their employment. It must bear the loss.”

12
PHILIPPINE NATIONAL BANK v. ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ G.R. No. 170325 | SEPTEMBER
26, 2008 | REYES, R.T., J. | THIRD DIVISION

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.
In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawer’s
instructions, i.e., to the named payee in the check.
The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry – banks are enjoined to be extra vigilant in the management and
supervision of their employees.

Facts
Sps. Rodriguez were clients of PNB, Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts. The spouses
were engaged in the informal lending business. In line with their business, they had a discounting arrangement with the Philnabank Employees Savings and
Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association
maintained current and savings accounts with PNB.

PEMSLA regularly granted loans to its members. Sps Rodriguez would rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers
devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this
out by forging the indorsement of the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of
PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees.
This was an irregular procedure made possible through the facilitation of Edmundo Palermon, Jr., treasurer of PEMSLA and bank teller in the PNB Branch.
It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty-nine (69) checks, in the total amount of P2,345,804.00. these were
payable to forty-seven (47) individual payees who were all members of PEMSLA.

PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result,
the PEMSLA checks deposited by the spouses were returned or dishonored for reason “Account Closed.” The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred
losses from the rediscounting transactions.

The spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philbankers (MCP), and PNB.
They sought to recover the value of their checks that were deposited to the PEMSLA savings account. The spouses contended that because PNB credited
the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees,
hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages should come from the
payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said payees, the obligation should be considered as discharged.

The RTC rendered Judgment in favor of spouses Rodriguez.

The CA reversed and set aside the RTC disposition. The CA concluded that the checks were obviously meant by the spouses to be really paid to
PEMSLA. However, upon the motion for reconsideration of the spouses, the CA reversed itself and ruled that PNB failed to present sufficient proof to
defeat the claim of spouses Rodriguez. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named
payees.

Issue
WON PNB was remiss in its duty as the drawee bank.

Ruling
YES. PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the
PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in
its operations. This Court has recognized the unique public interest possessed by the banking industry and the need for the people to have full trust and
confidence in their banks. For this reason, banks are minded to treat their customer’s accounts with utmost care, confidence, and honesty.

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In checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer’s instructions, i.e., to the named payee in the check. It should charge to the drawer’s accounts only the payables authorized by
the latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount charged to the drawer’s account.

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees.

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA account. Indeed,
when it is the gross negligence of the bank employees that caused the loss, the bank should be held liable.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to named payees, PNB was duty-bound by
law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should
be held liable for the amounts of the checks.

BANK OF AMERICA, NT & SA VS. ASSOCIATED CITIZENS BANK


G.R. Nos. 141001 & 141018, May 21, 2009, Carpio, J.

The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the contract between the bank and its customer (drawer), to pay the check only to
the payee or the payee’s order. The drawer’s instructions are reflected on the face and by the terms of the check. When the drawee bank pays a person other than the payee named on the
check, it does not comply with the terms of the check and violates its duty to charge the drawer’s account only for properly payable items.

FACTS: BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset Press,
Inc. (Miller), through the latter’s authorized representatives, i.e., Uy Kiat Chung, Ching Uy Seng, and
Uy Chung Guan Seng.

BA-Finance granted Miller a credit line facility through which the latter could assign or discount its trade receivables with the former.

Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement with BA-Finance whereby they jointly and severally
guaranteed the full and prompt payment of any and all indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of Assignment in favor of the latter. In consideration of the
assignment, BA-Finance issued four checks (amounting to P 741,227.78) payable to the "Order of Miller Offset Press, Inc." with the notation "For
Payee’s Account Only."

The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate secretary of Miller, in Account No. 989 in Associated Citizens
Bank (Associated Bank). Account No. 989 is a joint bank account under the names of Ching Uy Seng and Uy Chung Guan Seng.

Associated Bank stamped the checks with the notation "all prior endorsements and/or lack of endorsements guaranteed," and sent them through clearing.
Later, the drawee bank, Bank of America, honored the checks and paid the proceeds to Associated Bank as the collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently, BA-Finance filed a Complaint against Miller for collection
of the amount of P731,329.63 which BA-Finance allegedly paid in consideration of the assignment, plus interest at the rate of 16% per annum and penalty
charges.

Uy Kiat Chung and Uy Chung Guan Seng denied having signed the Continuing Suretyship Agreement with BA-Finance. In view thereof, BA-Finance filed
an Amended Complaint impleading Bank of
America as additional defendant for allegedly allowing encashment and collection of the checks by person or persons other than the payee
named thereon.

The RTC and CA ruled against Associated Bank.

ISSUE: Whether or not Associated Bank is liable to reimburse Bank of America for the amount of the four checks for being negligent.

RULING: Yes. Associated Bank is liable to reimburse Bank of America for the amount of the four checks for being negligent.

A collecting bank where a check is deposited, and which endorses the check upon presentment with the drawee bank, is an endorser. This Court has
repeatedly held that in check transactions, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness
of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment
has done its duty to ascertain the genuineness of the endorsements.

When Associated Bank stamped the back of the four checks with the phrase "all prior endorsements and/or lack of endorsement guaranteed," that bank
had for all intents and purposes treated the checks as negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so, Associated
Bank cannot deny liability on the checks

In Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, it was held that, the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.

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In presenting the checks for clearing and for payment, Associated Bank made an express guarantee on the validity of "all prior endorsements". Thus, stamped
at the back of the checks are Associated Bank’s clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, Bank of America would not have paid on the checks.

As the warranty has proven to be false and inaccurate, Associated Bank is liable for any damage arising out of the falsity of its representation.

EQUITABLE PCI BANK VS. TAN


G.R. No. 165339. August 23, 2010, J. Peralta, Second Division

As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.

FACTS: Arcelito B.Tan maintained a current and savings account with Philippine Commercial International Bank (PCIB), now Equitable PCI Bank.

On May 13, 1992, Tan issued PCIB Check No. 275100 postdated May 30, 1992 in the amount of P34,588.72 in favor of Sulpicio Lines, Inc. As of May 14,
1992, respondent's balance with Equitable PCI Bank was P35,147.59. On May 14, 1992, Sulpicio Lines, Inc. deposited the aforesaid check to its account
with Solid Bank, Carbon Branch, Cebu City. After clearing, the amount of the check was immediately debited by Equitable PCI Bank from Tan's account
thereby leaving him with a balance of only P558.87.

Meanwhile, Tan issued three checks from May 9 to May 16, 1992, payable to Agusan del Sur Electric Cooperative Inc. (ASELCO), to Agusan del Norte
Electric Cooperative Inc., (ANECO) and payable in cash for the amount of P10,000.00. When presented for payment, the three checks were dishonored
for being drawn against insufficient funds.

As a result of the dishonor of Check which were payable to ASELCO and ANECO, respectively, the electric power supply for the two mini-sawmills owned
and operated by Tan, located in Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off on June 1, 1992 and May 28, 1992, respectively,
and it was restored only on July 20 and August 24, 1992, respectively.

Due to the foregoing, Tan filed with RTC of Cebu City a complaint against Equitable PCI Bank, praying for payment of losses consisting of unrealized
income in the amount of P1,864,500.00. He also prayed for payment of moral damages, exemplary damages, attorney's fees and litigation expenses.

Tan claimed that Check No. 275100 was a postdated check in payment of Bills of Lading Nos. 15, 16 and 17, and that his account with Equitable PCI Bank
would have had sufficient funds to cover payment of the three other checks were it not for the negligence of Equitable PCI Bank in immediately debiting
from his account Check No. 275100, in the amount of P34,588.72, even as the said check was postdated to May 30, 1992. As a consequence of Equitable
PCI Bank 's error, which brought about the dishonor of the two checks paid to ASELCO and ANECO, the electric supply to his two mini-sawmills was cut
off, the business operations thereof were stopped, and purchase orders were not duly served causing tremendous losses to him.

In its defense, Equitable PCI Bank denied that the questioned check was postdated May 30, 1992 and claimed that it was a current check dated May 3, 1992.
It alleged further that the disconnection of the electric supply to Tan's sawmills was not due to the dishonor of the checks, but for other reasons not
attributable to the bank.

RTC ruled in favor of Equitable PCI Bank but the RTC ruling was reversed by the CA. Hence this petition.

ISSUE: Whether or not Equitable PCI Bank exercised the required degree of diligence for banks.

RULING: No. The law imposes on banks high standards in view of the fiduciary nature of banking. Although R.A. 8791 took effect only in the year 2000,
the Court had already imposed on banks the same high standard of diligence required under R.A. 8791 at the time of the untimely debiting of respondent's
account by petitioner in May 1992. In Simex International (Manila), Inc. v. Court of Appeals, the Court held that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.

The proximate cause of the loss is not Tan's manner of writing the date of the check, as it was very clear that he intended Check No. 275100 to be dated
May 30, 1992 and not May 3, 1992. The proximate cause is Equitable PCI Bank’s own negligence in debiting the account of the Tan prior to the date as
appearing in the check, which resulted in the subsequent dishonor of several checks issued by Tan and the disconnection by ASELCO and ANECO of his
electric supply.

The bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the order of the payee in accordance with the drawers
instructions as reflected on the face and by the terms of the check. Thus, payment made before the date specified by the drawer is clearly against the drawee
bank's duty to its client.

Equitable PCI Bank submits that Tan caused confusion on the true date of the check by writing the date of the check as 5/3/0/92. If, indeed, Equitable
PCI Bank was confused on whether the check was dated May 3 or May 30 because of the / which allegedly separated the number 3 from the 0,
Equitable PCI Bank should have required Tan to countersign the said / in order to ascertain the true intent of the drawer before honoring the
check.

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As a matter of practice, bank tellers would not receive nor honor such checks which they believe to be unclear, without the counter-signature of its drawer.
Equitable PCI Bank should have exercised the highest degree of diligence required of it by ascertaining from the respondent the accuracy of the entries
therein, in order to settle the confusion, instead of proceeding to honor and receive the check.

The diligence required of banks, therefore, is more than that of a good father of a family. In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately,
down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. From the foregoing, it is clear that Equitable PCI Bank
did not exercise the degree of diligence that it ought to have exercised in dealing with its client.

COMSAVINGS BANK VS. SPOUSES DANILO AND ESTRELLA CAPISTRANO


G.R. No. 170942, 28 August 2013, Bersamin

DOCTRINE: A banking institution is obliged to exercise the highest degree of diligence as well as high standards of integrity and performance in all its transactions because its
business is imbued with public interest

FACT:

Spouses Capistrano were the owners of a residential lot in Bacoor, Cavite who availed of the Unified Home Lending Program (UHLP) being implemented
by the National Home Mortgage Finance Corporation (NHMFC) for the construction of their house. The spouses Capistrano then entered into a
construction contract with GCB Builders which the latter committed to undertake the construction within 75 days. By virtue of this agreement, GCB
submitted its loan application with Comsavings Bank to finance the construction costs with understanding that Comsavings Bank will then reimbursed it
from NHMFC.

As required prior to the release of the loan, Comsavings Bank asked that Spouses Capistrano to sign the necessary documents including the Certification of
House Completion despite the fact that the construction of the house was in fact not yet finished. Moreover, it was also required that for NHMFC to
reimburse the loan, a photo of the fully constructed house bearing the signatures of the owner at the dorsal sides must be submitted. The bank did so but
the photo submitted was not the house of the Spouses Capistrano but of another’s and no signature, as required, was affixed to it.

Relying on the submitted documents, NHMFC demanded payment of the amortization. However, Spouses Capistrano protested and raised the defense that
the construction was not yet completed and that they did not sign the certification of completion.

ISSUE:

Whether or not Comsavings Bank was negligent for failure to exercise the diligence required of Banks?

RULING:

Yes. The court held that the business of bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving
irreproachable service. For this reason, the bank should guard against injury attributable to negligence or bad faith. The banking sector must at all times
maintain a high level of meticulousness.

In this case, had the Comsavings Bank complied with its duty of observe the highest degree of diligence, it would have checked first whether the photos
represent the actual property of its client and the same carried their signatures before releasing the loan. Also, the act of the bank of not giving the option
not to pre-sign the Certificate of Completion and asking the client to sign the same despite the fact that the actual construction of the house is not yet
completed showed negligence and irregularity in the exercise of standard operation procedure in banking.

With this, Comsavings Bank was held to be negligent in exercising the highest degree of diligence required of a bank.

DEVELOPMENT BANK OF THE PHILIPPINES v. GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION
G.R. No. 160758, January15, 2015, Bersamin, J.

DOCTRINE:
Being a banking institution, it should exercise the highest degree of diligence, as well as to observe the high standards of integrity and performance in all its transactions because its
business is imbued with public interest.The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks.

FACTS:

Guariña Corporation applied for a loan from DBP to finance the development of its resort complex in Iloilo. As required for the approval of the
loan application, Guariña executed a promissory note and a real estate mortgage in favor of DBP. Prior to the release of the loan, DBP required Guariña
Corporation to put up a cash equity for the construction of the buildings and other improvements. Guariña used the proceeds of the loan to defray the cost
of additional improvements in the resort complex. The loan was approved and it was agreed upon that the release shall be in an installment basis. Later on,
Guariña demanded the release of the balance of the loan, however, DBP refused and instead paid direcly some suppliers of Guariña despite its objection.

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Upon ocular visit, DBP found out that Guariña had not completed the construction hence demanding to expedite its completion. However, Guariña did
not heed the demand and therefore DBP initiated extrajudicial foreclosure proceedings. Guariña filed for specific performance of DBP’s obligations under
the loan agreement and to stop the foreclosure of the mortgages. However, DBP moved for the dismissal stating that the mortgaged properties were already
sold. Thus, Guariña sought to nullify the foreclosure proceedings and the cancellation of the certificate of sale.

ISSUE:

Whether DBP’s foreclosure and sale of the mortgaged properties were premature and therefore violated its duty to maintain highest degree of
diligence of a bank?

RULING:

YES. Being a banking institution, DBP owed it to Guariña Corporation to exercise the highest degree of diligence, as well as to observe the high standards
of integrity and performance in all its transactions because its business was imbued with public interest. The high standards were also necessary to ensure
public confidence in the banking system, for the stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks.
DBP had to act with great care in applying the stipulations of its agreement with Guariña Corporation, lest it erodes such public confidence.

In this case, DBP failed in its duty to exercise the highest degree of diligence by prematurely foreclosing the mortgages and unwarrantedly causing the
foreclosure sale of the mortgaged properties despite Guariña Corporation not being yet in default. Considering that DBP had yet to release the entire
proceeds of the loan, DBP could not yet make an effective demand for Guariña to perform its obligation under the loan.

F. Nature of Bank Funds and Bank Deposits

THE CONSOLIDATED BANK and TRUST CORPORATION vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs
G.R. No. 138569 | September 11, 2003 | Carpio, J.
This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family as required in Article 1172 of the Civil Code.

FACTS: L.C. Diaz, an accounting firm has been maintaining a savings account with Solidbank. On August 14, 1991, L.C. Diaz through its cashier (Macaraya),
instructed its messenger (Calapre), to deposit by virtue of two deposit slips the amount of P990 and P50 with Solidbank. Macaraya gave Calapre the Solidbank
passbook together with the money.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt of the deposit by returning
to Calapre the duplicate copies of the two deposit slips. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied
Bank, he left the passbook with Solidbank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the
passbook.

After learning of the incident, Macaraya went back to Solidbank together with Calapre and confirmed that indeed the passbook was missing and that someone
shorter than Calapre got the passbook. Teller No.6 even handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000
drawn on PBC. This PBC check of L.C. Diaz was a check that it had long closed. Failing to get back the passbook, Macaraya went back to her office and
reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.

15 August 1991, Luis C. Diaz (L.C. Diaz’ CEO), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
account. However, on the same day L.C. Diaz was informed of the unauthorized withdrawal the day before, of P300,000 from its savings account. The
withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however,
denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.

An Information of Estafa through Falsification of Commercial Document against its messengers, Ilagan and Verdazola was filed by L.C. Diaz in the RTC
of Manila but it was dismissed for lack of probable cause.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused prompting L.C. Diaz to file a
complaint for recovery of sum of money against Solidbank with the RTC.

The RTC absolved Solidbank while CA reversed the decision of the RTC. Hence, this petition.

ISSUE: Whether or not Solidbank has been negligent and should be made liable for the loss incurred by L.C. Diaz on account of the unauthorized withdrawal
from its lost passbook?

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

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The law imposes on banks high standards in view of the fiduciary nature of banking. Sec. 2 of RA 8791, declares that the State recognizes the fiduciary nature
of banking that requires high standards of integrity and performance. This new provision is an affirmation of the decision in Simex International v. Court
of Appeals, holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship.

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

Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible.
When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of
diligence in safeguarding the passbook.

In this case, the failure of Solidbank and Teller No. 6 to return the passbook to Calapre, the authorized representative of L.C. Diaz, raises the presumption
that it failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same.

Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the
required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.

However, the court also found that L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall
into the hands of an impostor. Thus, the liability of Solidbank should be reduced to 60% of the actual damages while the other 40% must be shouldered by
L.C. Diaz.

RUFA C. SUAN vs. ATTY. RICARDO D. GONZALEZ


A.C. NO. 6377 | March 12, 2007 | YNARES-SANTIAGO, J.

The filing of an intracorporate case before the RTC and a complaint with the Bangko Sentral ng Pilipinas, invoking BSP’s supervisory powers over banking operations which does not
amount to a judicial proceeding, does not constitute forum shopping.

FACTS: Complainant (Suan) is a Director and VP of Rural Green Bank of Caraga, Inc., a rural banking corporation at Montilla Blvd., Butuan City, while
respondent (Gonzales) is one of its stockholders.

On February 11, 2004, respondent filed a case for Mandamus, Computation of Interests, Enforcement of Inspection, Dividend and Appraisal Rights, Damages and Attorney's
Fees against the Rural Green Bank of Caraga, Inc. and the members of its Board of Directors before the RTC of Butuan City, Br, praying, that a TRO be
issued enjoining the conduct of the annual stockholders' meeting and the holding of the election of the Board of Directors.

On February 14, 2004, the trial court issued a TRO conditioned upon respondent's posting of a bond. Thereafter, respondent submitted a bond issued by
Stronghold Insurance Company, Incorporated (SICI) together with a Certification issued by then Court Administrator, now Associate Justice, Presbitero J.
Velasco, Jr. that, according to the Clerk of Court of the Municipal Trial Court in Cities (MTCC) of Butuan City, SICI has no pending obligation and/or
liability to the government insofar as confiscated bonds in civil and criminal cases are concerned.

Based on the foregoing, Suan filed this complaint alleging that:

1.) Respondent engaged in unlawful, dishonest, immoral or deceitful conduct when he submitted the certification to the RTC despite knowing that
the same is applicable only for transactions before the MTCC;
2.) The bond was defective because it was released by SICI despite respondent's failure to put up the required P100,000.00 collateral.
3.) Respondent committed perjury in the complaint it filed before the BSP against Ismael Andaya and the members of the Board of the Rural Green
Bank for alleged gross violation of the principles of good corporate governance, as they represented themselves as the bank's minority stockholders
with a total holdings amounting to more or less P5 million while the controlling stockholders own approximately 80% of the authorized capital
stock. Contrary to the actual figures of 6 million for the minority stockholders' stake and 70% of the outstanding capital stock owned by majority
stockholders.
4.) Respondent is guilty of forum shopping because the causes of action of the cases he filed before the RTC and the Bangko Sentral ng Pilipinas are the
same.

The IBP dismissed the case of disbarment against the respondent. Hence, this petition.

ISSUE: Whether or not respondent should be held guilty of the acts alleged by Suan.

RULING: No, Atty. Gonzales is not guilty of any of the acts alleged against him.

On the 4th allegation:


There is no forum shopping. The essence of forum shopping is the filing of multiple suits involving the same parties for the same cause of action, either
simultaneously or successively, for the purpose of obtaining a favorable judgment.

In this case, the filing of the intra-corporate case before the RTC does not amount to forum-shopping. It is a formal demand of respondent's legal rights in
a court of justice in the manner prescribed by the court or by the law with respect to the controversy involved. The relief sought in the case is primarily to

18
compel the bank to disclose its stockholdings, to allow them the inspection of corporate books and records, and the payment of damages. It was also prayed
that a TRO be issued to enjoin the holding of the annual stockholder's meeting and the election of the members of the Board, which, only courts of justice
can issue.

On the other hand, the complaint filed with the Bangko Sentral ng Pilipinas was an invocation of the BSP's supervisory powers over banking operations which
does not amount to a judicial proceeding. It brought to the attention of the BSP the alleged questionable actions of the bank's Board of Directors in violation
of the principles of good corporate governance. It prayed for the conduct of an investigation over the alleged unsafe and unsound business practices of the
bank and to make necessary corrective measures to prevent the collapse of the bank.

As such, the two proceedings are of different nature praying for different relief. Likewise, a ruling by the BSP concerning the soundness of the bank
operations will not adversely or directly affect the resolution of the intra-corporate controversies pending before the trial court.

NOTE: The rulings on the first three allegations were not discussed as they are not related to banking, the 4 th allegation is the closest issue related to banking but not under the heading
of Nature of Bank Funds and Bank Deposits.

G. Stipulation on Interests

FIDELITY SAVINGS AND MORTGAGE BANK, petitioner, vs.


HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the CFI Manila and SPOUSES TIMOTEO AND OLIMPIA
SANTIAGO, respondents,
G.R. No. L-46208, April 5, 1990, REGALADO, J.

It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank of the Philippines cannot be
held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational.

FACTS:
In 1968, Spouses Santiago deposited with the Fidelity Savings and Mortgage Bank (FSMB) an aggregate amount of P100,000. On February 18,
1969, the Monetary Board, after finding that the condition of FSMB is one of insolvency issued Resolution No. 350 directing its closure and having all its
assets be taken charge by the Monetary Board. Subsequently, PDIC paid the spouses P10,000 leaving a balance of P90,000. Thereafter, the Monetary Board
directed the liquidation of the bank. Pending liquidation, spouses Santiago sent demand letters to the bank demanding the immediate payment of the
aforementioned deposit but remained unheeded. This prompted the spouses to file an action for a sum of money with damages against the bank.

CFI Manila, in its decision ordered the bank to pay the following amounts: (a) P90,000 with accrued interest until fully paid; (b) P30,000 as
exemplary damages; and (c) P10,000 for attorney's fees, hence the instant petition for review to the Supreme Court.

ISSUES:
1. WON an insolvent bank like the FSMB may be adjudged to pay interest on unpaid deposits even after its closure by the Central Bank by reason
of insolvency;
2. WON an insolvent bank may be adjudged to pay moral and exemplary damages, attorney's fees and costs;

RULING:
1st issue: NO. It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank
of the Philippines cannot be held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational.

In The Overseas Bank of Manila vs. CA, the Court held that:
..what enables a bank to pay stipulated interest on money deposited with it is the other aspects of its operation from which it generates funds to
cover the payment of such interest. Unless a bank can engage in other banking and financing activities from which it can derive income, it is
inconceivable how it can carry on as a depository obligated to pay stipulated interest….Consequently, it should be deemed read into every contract
of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by
the duly constituted authority, the Central Bank.

From the aforecited authorities, it is manifest that petitioner bank cannot be held liable for interest on deposits which accrued from the time it
was prohibited by the Central Bank to
continue with its banking operations, that is, when Resolution No. 350 to that effect was issued on February 18, 1969. Thus, the P90,000 deposit of the
spouses should only earn interest up to February 18, 1969.

2nd issue: NO. The insolvent bank may not be adjudged to pay moral, exemplary damages and attorney's fees.

There was no fraud or bad faith on the part of bank in accepting the deposits. The bank could not even be faulted in not immediately returning
the amount claimed considering that the demand to pay was made and the collection suit was filed in the trial court several months after its closure where it
was no longer in a position to comply with its obligations to its creditors, hence moral damages cannot be awarded.

The award of exemplary damages which is supposed to serve as a warning to other banks from dissipating their assets in anomalous transactions
was likewise without basis. It was not proven that petitioner bank actually engaged in anomalous real estate transactions. Hence, it was error for the lower
court to impose exemplary damages upon petitioner bank since, in contracts, such sanction requires that the offending party acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. Neither does this case present the situation where attorney's fees may be awarded.

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Note: SC agreed with the bank that the spouses’ claims should have been filed in the pending liquidation proceedings, nevertheless it held that the decision
rendered in the instant case would not be violative of the legal provisions on preference and concurrence of credits. As the trial court puts it, “the order of
payment should not be understood as raising the deposits to the category of preferred credits of the bank but shall be paid in accordance with the Bank
Liquidation Rules and Regulations”.

ILEANA DR. MACALINAO, petitioner, vs. BANK OF THE PHILIPPINE ISLANDS, respondent.
G.R. No. 175490, September 17, 2009, VELASCO, JR., J.

The stipulated interest rates of 3% per month and higher is excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against
the law. Since the stipulation is void, it is as if there was no express contract thereon. As to penalty charge, the court shall equitably reduce the same when the principal obligation has
been partly or irregularly complied with by the debtor or when it is unconscionable.

FACTS:

Ileana Macalinao was an approved cardholder of BPI Mastercard. She made some purchases through the use of the said credit card and defaulted
in paying for said purchases. Under the Terms and Conditions Governing the Issuance and Use of the Card, the charges or balance thereof remaining unpaid after the
due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee of 3% per month.

Macalinao made partial payments thereon but failed to settle the full obligation. This prompted BPI to file with the MeTC a complaint for a sum
of money against her. MeTC ruled in favour of BPI but it nevertheless declared as unconscionable the bank’s imposition of total interest rate of 9.25% per
month or 111% per annum, hence it reduced the interest and penalty charges to 2% per month.

RTC affirmed in toto the decision of the MeTC but CA on appeal modified and increased
the amount of interest rate from 2% to 3% monthly (interest rate at 1.5% and penalty charge at 1.5%)
which according to it is based on the Terms and Conditions of the card which in turns governs the transaction between the parties.

ISSUE:

WON the interest rate and penalty charge of 3% per month is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest and
hence should be reduced to 2% per month.

RULING:

YES. The interest rate and penalty charge of 3% per month or 36% per annum although stipulated in the Terms and Conditions Governing the Issuance
and Use of the Card is excessive and unconscionable and should be equitably reduced to 2% per month or 24% per annum.

The Court in Chua vs. Timan held:


“We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While
C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to
raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.”

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as
reason and equity demand.

The same is true with respect to the penalty charge. Pertinently, Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may
be iniquitous and unconscionable in one may be totally just and equitable in another. In the instant case, the records would reveal that Macalinao made
partial payments to BPI, as indicated in her Billing Statements. This, coupled with the fact that the stipulated penalty charge of 3% per month or 36% per
annum, in addition to regular interests is indeed iniquitous and unconscionable justifies the reduction of such penalty charge.

HEIRS OF ESTELITA BURGOS-LIPAT, NAMELY: ALAN B. LIPAT AND ALFREDO B. LIPAT, JR. v. HEIRS OF EUGENIO D.
TRINIDAD, NAMELY: ASUNCION R. TRINIDAD, VICTOR R. TRINIDAD, IMACULADA T. ALFONSO, CELESTINA T.
NAGUIAT, FERNANDO
R. TRINIDAD, MICHAEL R. TRINIDAD AND JOSEFINA T. NAGUIAT
G.R. NO. 185644. MARCH 2, 2010, CORONA, J.

The rate of interest specified in the mortgage contract shall be applied for the one-year period reckoned from the date of registration of the certificate of sale in accordance with
the General Banking Act. However, since petitioners effectively had more than one year to exercise the right of redemption, justice, fairness and equity require that they pay 12% p.a.
interest beyond the one-year period up to June 16, 2004 when Partas consigned the redemption price with the RTC.

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FACTS:

Estelita Burgos-Lipat and Alfredo Lipat (spouses Lipat) obtained a P583,854 loan from Pacific Banking Corporation (PBC), secured by a real
estate mortgage on their Quezon City property. The mortgage was eventually extended to secure additional loans, discounting lines, overdrafts and credit
accommodations that petitioners subsequently obtained from PBC. Due to petitioners' failure to pay their loans, PBC foreclosed on the subject property.
Eugenio D. Trinidad was declared the highest bidder during the public auction and was issued a certificate of sale. Petitioners filed a complaint for annulment
of mortgage, extra-judicial foreclosure and certificate of sale. RTC dismissed the complaint but granted petitioners five months and 17 days from the finality
of the decision to exercise their right of redemption over the foreclosed property.

Meanwhile, petitioners assigned their rights over the contested property to Partas Transporation Co., Inc. (PTCI). However, respondent heirs of
Trinidad refused to claim the redemption money and surrender the certificate of title covering the foreclosed property, claiming the amount tendered was
inadequate, i.e., the interest of 1% per month was computed only for a one-year period. Ultimately, the RTC upheld the exercise of redemption and directed
respondents to surrender the certificate of title. Respondents' motion for reconsideration was denied. Notice of Appeal was denied. Petitioners moved for
execution which was granted by the RTC. No MR was filed and went directly to the CA. CA set aside the order of RTC. MR was denied.

ISSUE:

Should the 1% per month interest for one year be applied as stated in the mortgage contract?

RULING: NO

The one-year redemption period applied by the CA is the rule that generally applies to foreclosure of mortgage by a bank. The period of redemption
is not tolled by the filing of a complaint or petition for annulment of the mortgage and the foreclosure sale conducted pursuant to the said mortgage.
However, considering the exceptional circumstances surrounding this case, we will not apply the rule in this instance pro hac vice.

In Lipat, this Court upheld the RTC decision giving petitioners five months and 17 days from the finality of the trial court's decision to redeem
their foreclosed property. Lipat, already final and executory, has therefore become the law of the case between the parties, including their heirs who are
petitioners and respondents in this case. In Union Bank of the Philippines v. ASB Development Corporation, we explained:
Law of the case has been defined as "the opinion delivered on a former appeal. More specifically, it means that whatever is already irrevocably
established as the controlling legal rule or decision between the same parties in the same case continues to be the law of the case, whether correct on general
principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court."

Consequently, petitioners had five months and 17 days from the finality of Lipat to exercise their right of redemption, even though this period
was beyond one year from the date of registration of the sale.

Thus, the CA erred (and even committed a grave abuse of discretion) when it insisted on a contrary ruling. The CA had no power to reverse this
Court's final and executory judgment. The CA overstepped its authority when it held that the right of redemption had already expired one year after the date
of the registration of the certificate of sale. Like all other courts in our judicial system, the CA must take its bearings from the rulings and decisions of this
Court.

Nevertheless, we note that the amount tendered by petitioners to redeem their foreclosed property was determined by the sheriff at the rate of
one percent per month for only one year. Section 78 of the General Banking Act requires payment of the amount fixed by the court in the order of execution,
with interest thereon at the rate specified in the mortgage contract, and all the costs and other judicial expenses incurred by the bank or institution concerned
by reason of the execution and sale and as a result of the custody of said property less the income received from the property. The rate of interest specified
in the mortgage contract shall be applied for the one-year period reckoned from the date of registration of the certificate of sale in accordance
with the General Banking Act. However, since petitioners effectively had more than one year to exercise the right of redemption, justice, fairness
and equity require that they pay 12% p.a. interest beyond the one-year period up to June 16, 2004 when Partas consigned the redemption price
with the RTC.

ASIATRUST DEVELOPMENT BANK v. CARMELO TUBLE


G.R. No. 183987, July 25, 2012, SECOND DIVISION (Sereno, J.)

Key Doctrine: “Redemption is by force of law, and the purchaser at public auction is bound to accept it. Thus, it is the law that provides the terms of the right; the mortgagee cannot
dictate them. The terms of this right are based on Section 47 of the General Banking Law.”

Tuble, vice-president of Asiatrust, availed the car incentive plan - acquiring a Nissan Vanette - and loan privileges offered by the bank. He was
entitled to the bank's Senior Managers Deferred Incentive Plan (DIP). Tuble obtained 3 separate loans. The first, a real estate loan, evidenced by Promissory
Note (PN) 0142 secured by a mortgage over his property with no interest indicated. The second was a consumption loan evidenced by PN 0143 with an
interest of 18% per annum. Tuble allegedly obtained a salary loan, his third loan. Later, he resigned and was given the option to return the vehicle without
any further obligation or retain the unit and pay its remaining book value. In turn, Asiatrust owed Tuble (1) his pro-rata share in the DIP; and (2) final salary
and 13th month pay. Tuble claimed offsetting of loans could take place which was allowed by the bank. His liabilities were reduced to P970,691.46 plus the
unreturned value of the vehicle. The bank filed a complaint for replevin of the vehicle and was granted. It also filed a Petition for Extra-judicial Foreclosure
of real estate mortgage over his property based only on his real estate loan amounting to P421,800. Tuble redeemed the property with the increased price of

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P1,318,401.91 because the bank imposed additional interest and charges. Tuble questioned how the foreclosure basis ballooned to P1,318,401.91 in a matter
of 1 year. The bank explained that it included the car's book value, the salary loan, car insurance, 18% annual interest on the bank's redemption price of
P421,800, penalty and interest charges on PN No. 0142, and litigation expenses. Tuble filed for recovery of a sum of money and damages seeking to
collect the excess charges on the redemption price and damages which was granted. The RTC ruled that the 18% annual interest on the bid price of P421,800
was unlawful. Act 3135 only allows the mortgagee to charge an interest of 1 % per month if the foreclosed property is redeemed which was affirmed by the
CA.

ISSUE:

Is the bank entitled to include the interest charges on the promissory note of the loans and the 18% annual interest on the bid price of P421,800?

HELD:

No. In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the obligation. As a result, payment is effected
by abnormal means whereby the debtor is forced by a judicial proceeding to comply with the presentation or to pay indemnity. Once the proceeds from the
sale of the property are applied to the payment of the obligation, the obligation is already extinguished. Thus, in Spouses Romero v. Court of Appeals, we held
that the mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property, and that what remained was the right of redemption
granted by law.

Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no longer rely on it or invoke its provisions, including
the dragnet clause stipulated therein. It follows that the bank cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an obligation
allegedly covered by the terms of the Contract.

The right of redemption of foreclosed properties was a statutory privilege he enjoyed. Redemption is by force of law, and the purchaser at public
auction is bound to accept it. Thus, it is the law that provides the terms of the right; the mortgagee cannot dictate them. The terms of this right, based on
Section 47 of the General Banking Law, are as follows: (1) The redemptioner shall have the right within one year after the sale of the real estate, to redeem
the property. (2) The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the
costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. (3) In case of
redemptioners who are considered by law as juridical persons, they shall have the right to redeem not after the registration of the certificate of foreclosure
sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Consequently, the
bank cannot alter that right by imposing additional charges and including other loans. Verily, the freedom to stipulate the terms and conditions of an
agreement is limited by law.

In any event, assuming that the Real Estate Mortgage Contract subsists, we rule that the dragnet clause therein does not justify the imposition of
an 18% annual interest on the redemption price. This Court has recognized that, through a dragnet clause, a real estate mortgage contract may exceptionally
secure future loans or advancements. But an obligation is not secured by a mortgage, unless, that mortgage comes fairly within the terms of the mortgage
contract.

In addition to the 18% annual interest, the bank also claims a 12% interest per annum on the consumption loan. Notwithstanding that Promissory
Note No. 0142 contains no stipulation on interest payments, the bank still claims that Tuble is liable to pay the legal interest. This interest is currently at 12%
per annum, pursuant to Central Bank Circular No. 416 and Article 2209 of the Civil Code, which provides: “If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.”

Thus, a default must exist before the bank can collect the compensatory legal interest of 12% per annum. In this regard, Tuble denies being in
default since, by way of legal compensation, he effectively paid his liabilities on time. This argument is flawed. The bank correctly explains in its Petition
that in order for legal compensation to take effect, Article 1279 of the Civil Code requires that the debts be liquidated and demandable. Liquidated debts are
those whose exact amount has already been determined. In this case, the receivable of Tuble, including his DIP share, was not yet determined; it was the
petitioner's policy to compute and issue the computation only after the retired employee had been cleared by the bank. Thus, Tuble incorrectly invoked legal
compensation in addressing this issue of default.

Nevertheless, based on the findings of the RTC and the CA, the obligation of Tuble as evidenced by Promissory Note No. 0142, was set to mature
on 1 January 1999. But then, he had already settled his liabilities on 17 March 1997 by paying PI,318,401.91 as redemption price. Then, in 1999, the bank
issued his Clearance and share in the DIP in view of the full settlement of his obligations. Thus, there being no substantial delay on his part, the CA did not
grievously err in not declaring him to be in default.

From all the foregoing, we rule that the appellate court correctly deleted the 18% annual interest charges, albeit for different reasons. First, the
interest cannot be imposed, because any reference to it under the Real Estate Mortgage Contract is misplaced, as the contract is already extinguished. Second,
the said interest cannot be collected without any basis in terms of Tuble's redemption rights. Third, assuming that the Real Estate Mortgage Contract subsists,
the bank cannot collect the interest because of the contract's ambiguity. Fourth, the dragnet clause referred to in the contract cannot be presumed to include
the 18% annual interest specified in the consumption loan. Fifth, with respect to the compensatory interest claimed by the bank, we hold that neither is the
interest due, because Tuble cannot be deemed to be in default of his obligations.

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO OLAGUER v. BANGKO SENTRAL MONETARY BOARD,
represented by GOVERNOR ARMANDO TETANGCO et al. G.R. No. 192986, 15 January 2013, Reyes, J.

The lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and iniquitous interest.

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FACTS.

R.A. No. 265 which created the Central Bank of the Philippines empowered the CB-MB to, among others, set the maximum interest rates which
banks may charge for all types of loans and other credit operations, within limits prescribed by the Usury Law. Later on, the Usury Law was amended by
P.D. No. 1684 giving the CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the
forbearance of any money, goods, or credits, provided that the changes are effected gradually and announced in advance. In its Resolution No. 2224, the
CB-MB issued CB Circular No. 905, Series of 1982. Section 1 thereof removed the ceilings on interest rates on loans and forbearance of any money, goods
or credits.

President Fidel V. Ramos then signed into law R.A. No. 7653 establishing the BSP to replace the CB. The repealing clause thereof provides that
“Except as may be provided for in Sections 46 and 132 of this Act, R.A. No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said R.A. No. 265, as amended, or parts thereof, which may be inconsistent with the provisions of this Act are hereby repealed.”

Petitioner AFTIL is a nonprofit, non-stock corporation organized to engage in pro bono concerns and activities relating to money lending issues.
It filed this petition, joined by its founder and president, Eduardo B. Olaguer, suing as a taxpayer and a citizen. Petitioners, claiming that they are raising
issues of transcendental importance to the public, filed directly with this Court this Petition for Certiorari under Rule 65, seeking to declare that the BSP-
MB, replacing the CB-MB, has no authority to continue enforcing CB Circular No. 905, issued by the CB-MB, which “suspended” the Usury Law.

ISSUE.

1) Did the CB-MB exceeded its authority in issuing CB Circular No. 905 which removed all interest ceilings? NO
2) May the new BSP-MB continue to enforce CB Circular No. 905? YES

HELD.

1) NO. It did not engage in self-legislation when it issued the said Circular. The CB-MB merely suspended the effectivity of the Usury Law when it issued
CB Circular No. 905, this has long been recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. CA, citing
several cases,
CB Circular No. 905 “did not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity.” A Central Bank Circular cannot
repeal a law. Only a law can repeal another law.
2) YES, the BSP-MB has the authority to enforce CB Circular No. 905. A closer perusal shows that Section 109 of R.A. No. 265 covered only loans
extended by banks, whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates of interest for all
loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well
as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or unconscionable interests have been invariably
struck down for being contrary to morals, if not against the law. Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent
and void ab initio, and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived. Nonetheless, the nullity of the stipulation
of usurious interest does not affect the lender’s right to recover the principal of a loan, nor affect the other terms thereof. Thus, in a usurious loan with
mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due. The
debt due is considered as without the stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the excessive interest
formerly imposed, following the guidelines laid down in the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals.

H. Grant of Loans and Security Requirements

BANCO DE ORO, PETITIONER-APPELLANT, VS. JAIME Z. BAYUGA AND ROBERTO P. TOLENTINO, RESPONDENTS-
APPELLEES, THE COURT OF APPEALS AND HON. FRANCISCO DE LA ROSA IN HIS CAPACITY AS JUDGE OF THE CFI-
RIZAL, BRANCH VII PASAY CITY, RESPONDENTS
G.R. No. L-49568, October 17, 1979, FIRST DIVISION, MELENCIO-HERRERA
Facts
On 2 November 1976, as security for a loan of P375K, respondent Bayuga, as attorney-in-fact of respondent Tolentino, and Zaballero, executed
a Real Estate Mortgage (REM) in favor of the Acme Savings Bank (now Banco de Oro - Bank) over a parcel of land in Calamba, Laguna under the names
of Tolentino and Zaballero. The purpose of the loan was for the acquisition of a property located in Tagaytay (registered in the name of Algue Corporation).
On 15 November 1976, the Bank made a partial release of P200K less charges of P6K, which amount was credited to the account of Tolentino.
On the same date, out of the balance of P194,000.00, Tolentino purchased from the BANK a certificate of time deposit in the amount of P50K. He also
withdrew on the said date P100K and P44K the next day. Tolentino then purchased from the BANK a Manager's check in the total amount of P144K,

23
P135K of which he deposited in his savings account, and P9K in his checking account, both with the Far East Bank & Trust Company. Thereafter, claiming
that the borrowers showed no indication of complying with his obligation to pay the amount of the loan to the vendor (Algue, Inc.) of the Tagaytay City
property, which constituted diversion in violation of Sec. 77, Republic Act No. 3371, the BANK stopped payment of its Manager's check at the same time
that it refused to release the balance of the loan. That action was necessary, according to the Bank, in order to prevent private respondent from perpetrating
a fraud against it.
Thereafter, Tolentino and Bayuga filed an action for specific performance against the Bank before the CFI of Rizal. In ruling in favor of private
respondents, the CFI reasoned that denying private respondents relief would have been to deny the borrowers relief from the substantial injustice with which
they have been burdened considering that their land had been mortgaged (the Laguna property) without the BANK having paid any centavo for the loan.
In affirming the trial court, the CA reasoned that it was most persuaded by the fact that the loan is intended to buy real estate property, the price of which
varies as days go by.
The bank maintains that BANK maintains that the issuance of the Writ would patently work violence with justice and equity because the property
given as collateral2 as well as the bonds which have been posted are inadequate, and petitioner would be made to violate the Sec. 77 of RA 337.
Issue
Was the bank correct in unilaterally cancelling the loan?

Ruling
Yes. While, prima facie, execution pending appeal3 seemed justified because of the unilateral cancellation of the release of the loan by the bank
without notice, and the absence of complete supporting documents to the Petition, disclosures by the parties during the hearing and pleadings and documents
subsequently filed uphold a contrary view.
In his comment, Tolentino contended that he is not a party to the mortgage which was executed only between the bank and Bayuga; that he
became a party only because he was "injured and damaged by the bad faith of the bank;" that he is not willing to co-sign a promissory note in the BANK's
favor for the amount of P389,000.00, alleging that Bayuga had already signed a promissory note in November, 1976 in the sum of P200,000.00; and that
neither he nor Bayuga had obligated himself to put up any additional collateral. Bayuga, for his part, during the hearing, assumed a very passive role admitting
that he was but an employee of Tolentino who was the prime mover in the entire transaction.
The lack of good faith and of a sense of fair play on the part of private respondents was all too evident. They were treating the release of the
amount of P389,000.00 in their favor more as a money judgment, which it is not, rather than as a loan which it is. They want to avail of the full benefits of
the loan without assumption of the corresponding obligations, or very minimally at that. Since receipt of the aforestated amount, they have even refused to
make any monthly amortizations even upon demand by the BANK, contending that "no amount of the said loan is due. It will only be paid ten (10) years
after the execution of the mortgage contract as interpreted by our Courts." Further, there is a gross inadequacy between the value of the loan and the
collateral given by the private respondents.
The special reason cited by the trial Court and upheld by the Court of Appeals, i.e., the "substantial injustice" wrought on private respondents
whose land had been mortgaged without any centavo paid for the loan, does not exist in law. As pointed out by the bank, the Calamba property need not
have remained subject to the mortgage, the mortgage being but an accessory contract to the contrast of loan which is the principal obligation and which has
been cancelled. The consideration of the mortgage is the same consi-deration of the principal contract without which it cannot exist as an independent
contract. The "persuasive" factor considered by the Court of Appeals "that the loan is intended to buy real estate property, the price of which varies as days
go by" was disproved by the fact that Tolentino utilized the amount initially released to purchase a certificate of time deposit and to open bank accounts (2nd
paragraph of the facts) in his name rather than pay for the Algue property.
The unfairness and inequity of this posture to the banking business is too evident to require elaboration. Funds of a bank are, in a sense held in
trust. There are the interests of depositors to be protected.

Decision of TC and CA reversed.


1. Sec. 77 - The purpose of all loans shall be stated in the contract between the bank and the borrower. If the bank finds that the funds have been employed,
without its approval, for purposes other than those agreed upon with the bank, the bank shall have the right to terminate the loan and demand immediate
repayment of the obligation. *note this is under the old law. Sec. 77 is now in the second paragraph of Sec. 39 of the Gen. Banking Act of 2000 which is
worded:
“The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the
bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed
upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation”
2. The Laguna property was valued at around P157.8k compared to the loan that was P375K. The property sought to be acquired was supposed to be added
as collateral but given the allegation that private respondents had no intention of using the loan to pay the Tagaytay property; the bank stopped paying the
loan.
3The issue stated in this case was the propriety of the TC’s grant of the writ of execution filed by private respondents but the legal issue as stated in this
digest are essentially the same.

JOSE C. GO vs BANGKO SENTRAL NG PILIPINAS


G.R. No. 178429, October 23, 2009, BRION, J .

KEY DOCTRINE: Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking institution;

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2. the offender, either directly or indirectly, for himself or as representative or agent of another, performs any of the following acts:
a. he borrows any of the deposits or funds of such bank; or
b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or
c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written approval of the majority of the directors of the bank, excluding the offender, as the director concerned.

An Information for violation of Section 83 (now Section 36) of RA 337 or the General Banking Act, as amended by PD 1795, was filed against Go before
the RTC. The charge alleged that he, being then the director and the president and chief executive officer of the Orient Bank, taking advantage of his position
as such, unlawfully and knowingly borrow, either directly or indirectly, for himself or as the representative of his other related companies, the deposits or
funds of the said banking institution and/or become a guarantor, indorser or obligor for loans from the said bank to others, by then and there using said
borrowed deposits/funds of the said bank in facilitating and granting and/or caused the facilitating and granting of credit lines/loans and, among others, to
the New Zealand Accounts loans in the total amount of P2.74 billion, said accused knowing fully well that the same has been done by him without the
written approval of the majority of the Board of Directors of said Orient Bank and which approval the said accused deliberately failed to obtain and enter
the same upon the records of said banking institution and to transmit a copy of which to the supervising department of the said bank, as required by law.

Go filed a motion to quash the Information. He insists that the Information failed to allege the acts or omissions complained of with sufficient particularity
to enable him to know the offense being charged. Go averred that based on the facts alleged therein, he was being prosecuted for borrowing the deposits or
funds of the Orient Bank and/or acting as a guarantor, indorser or obligor for the bank's loans to other persons. The use of the word "and/or" meant that
he was charged for being either a borrower or a guarantor, or for being both a borrower and guarantor. Go claimed that the charge was not only vague, but
also did not constitute an offense. He posited that Section 83 of RA 337 penalized only directors and officers of banking institutions who acted either as
borrower or as guarantor, but not as both. The RTC granted Go’s motion to quash. The CA reversed it. Hence, this petition for certiorari.

Go basically reiterated the argument he raised in his motion to quash. Additionally, he reiterates his claim that credit accommodations by banks to their
directors and officers are legal and valid, provided that these are limited to their outstanding deposits and book value of the paid-in capital contribution in
the bank. The failure to state that he borrowed deposits and/or guaranteed loans beyond this limit rendered the Information defective.

ISSUE Is Go liable for violation of Sec. 83 of the General Banking Act?

RULING: YES.

A simple reading of the above elements easily rejects Go's contention that the law penalizes a bank director or officer only either for borrowing the bank's
deposits or funds or for guarantying loans by the bank, but not for acting in both capacities. The essence of the crime is becoming an obligor of the
bank without securing the necessary written approval of the majority of the bank's directors.
The second element merely lists down the various modes of committing the offense. The third mode, by declaring that “no director or officer of any banking
institution shall in any manner be an obligor for money borrowed from the bank or loaned by it," in fact serves a catch-all phrase that covers any situation
when a director or officer of the bank becomes its obligor.

Section 83 of RA 337, as well as other banking laws adopting the same prohibition, was enacted to ensure that loans by banks and similar financial institutions
to their own directors, officers, and stockholders are above board. Banks were not created for the benefit of their directors and officers; they cannot use the
assets of the bank for their own benefit, except as may be permitted by law.

Contrary to Go's claims, the second paragraph of Section 83, RA 337 does not provide for an exception to a violation of the first paragraph thereof, nor
does it constitute as an element of the offense charged. Section 83 of RA 337 actually imposes three restrictions: approval, reportorial, and ceiling
requirements.

The approval requirement refers to the written approval of the majority of the bank's board of directors required before bank directors and officers can in
any manner be an obligor for money borrowed from or loaned by the bank. Failure to secure the approval renders the bank director or officer concerned
liable for prosecution and, upon conviction, subjects him to the penalty provided in the third sentence of first paragraph of Section 83. The reportorial
requirement, on the other hand, mandates that any such approval should be entered upon the records of the corporation, and a copy of the entry be
transmitted to the appropriate supervising department. The reportorial requirement is addressed to the bank itself, which, upon its failure to do so, subjects
it to quo warranto proceedings under Section 87 of RA 337. The ceiling requirement under the second paragraph of Section 83 regulates the amount of
credit accommodations that banks may extend to their directors or officers by limiting these to an amount equivalent to the respective outstanding deposits
and book value of the paid-in capital contribution in the bank. Again, this is a requirement directed at the bank. In this light, a prosecution for violation of
the first paragraph of Section 83, such as the one involved here, does not require an allegation that the loan exceeded the legal limit. Even if the loan involved
is below the legal limit, a written approval by the majority of the bank's directors is still required; otherwise, the bank director or officer who becomes an
obligor of the bank is liable. Compliance with the ceiling requirement does not dispense with the approval requirement.

Evidently, the failure to observe the three requirements under Section 83 paves the way for the prosecution of three different offenses, each with its own
set of elements. A successful indictment for failing to comply with the approval requirement will not necessitate proof that the other two were likewise not
observed.

HILARIO P. SORIANO v. PEOPLE OF THE PHILIPPINES, BSP, PDIC, PUBLIC PROSECUTOR ANTONIO BUAN and STATE
PROSECUTOR ALBERTO FONACIER

G.R. No. 162336, 1 February 2010, J. Del Castillo

KEY DOCTRINE.

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A bank officer violates the DOSRI law when he acquires bank funds for his personal benefit, even if such acquisition was facilitated
by a fraudulent loan application. Directors, officers, stockholders, and their related interests cannot be allowed to interpose the fraudulent nature of
the loan as a defense to escape culpability for their circumvention of Section 83 of R.A. No. 337.

FACTS.
Affidavits were submitted before the Prosecutor’s office charging Hilario Soriano with Estafa through falsification of commercial documents
in relation to P.D. No. 1689 and for violation of Section 83 of R.A. No. 337, whereby it was alleged that the spouses Carlos appeared to have an outstanding
loan of P8 million with the Rural Bank of San Miguel (Bulacan), Inc., but had never applied for nor received such loan; that it was petitioner, who was
then president of the Bank, who had ordered, facilitated, and received the proceeds of the loan. Soriano however contends that the commission of
estafa is inherently incompatible with the violation of the DOSRI law, as petitioner contends. Essentially, the petitioner theorized that the characterization
of possession is different in the two offenses. If petitioner acquired the loan as DOSRI, he owned the loaned money and therefore, cannot misappropriate
or convert it as contemplated in the offense of estafa. Conversely, if petitioner committed estafa, then he merely held the money in trust for someone else
and therefore, did not acquire a loan in violation of DOSRI rules.

ISSUE.
Is a loan transaction within the ambit of the DOSRI law subject to Estafa under the Revised Penal Code? YES.

RULING.
Petitioner’s theory is based on the false premises that the loan was extended to him by the bank in his own name, and that he became the owner
of the loan proceeds. Both premises are wrong. The bank money (amounting toP8 million) which came to Soriano’s possession was money held in trust or
administration by him for the bank, in his fiduciary capacity as the President of said bank. Soriano, through falsification, made it appear that said Enrico
Carlos applied for the loan when in fact he did not. Through such fraudulent device, petitioner obtained the loan proceeds and converted the same. Under
these circumstances, it cannot be said that petitioner became the legal owner of the P8 million. Thus, petitioner remained the banks fiduciary with respect
to that money, which makes it capable of misappropriation or conversion in his hands.
The prohibition in Section 83 is broad enough to cover various modes of borrowing. It covers loans by a bank director or officer which are made
either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. It applies even if the director or officer is a mere guarantor,
indorser or surety for someone else's loanor is in any manner an obligor for money borrowed from the bank or loaned by it. Indirect borrowing applies in
the instant case, the Information describes the manner of securing the loan as indirect; names petitioner as the benefactor of the indirect loan; and states
that the requirements of the law were not complied with. It contains all the required elements for a violation of Section 83, even if petitioner did not secure
the loan in his own name. In sum, the informations filed against Soriano do not negate each other.
*From DC.

REPUBLIC OF THE PHILIPPINES v. SANDIGANBAYAN, et al.


G.R. Nos. 166859, 169203 and 180702, 12 April 2011, EN BANC (Bersamin, J.)

DOCTRINE OF THE CASE

The Republic could not outrightly assume that President Marcos had issued LOI 926 for the purpose of allowing the loans by the UCPB in favor of Cojuangco. There
must be competent evidence to that effect. The loans, assuming that they were of a DOSRI nature or without the benefit of the required approvals or in excess of the Single Borrowers
Limit, would not be void for that reason. Instead, the bank or the officers responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law.

FACTS

In 1987, the Republic commenced tbe civil case before the Sandiganbayan, impleading as defendants Eduardo M. Cojuangco, Jr. and 61 other
individuals. More than three years later, the Republic once more amended the complaint apparently to avert the nullification of the writs of sequestration
issued against properties of Cojuangco. In 1999, the Sandiganbayan allowed the subdivision of the complaint in the civil case into eight complaints, each
pertaining to distinct transactions and properties and impleading as defendants only the parties alleged to have participated in the relevant transactions or to
have owned the specific properties involved. However, the writs of sequestration were lifted for violating PCGG Rules requiring approval of 2 PCGG
commissioners.

Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC stock through the 14 holding companies owned by the CIIF Oil Mills. Also
impleaded as defendants in the civil case were several corporations alleged to have been under Cojuangco’s control and used by him to acquire the block of
shares of San Miguel Corporation (SMC).

The complaint materially averred that Cojuangco, as a public officer during the Marcos administration, acquired assets, funds, and other property
grossly and manifestly disproportionate to his salaries, lawful income and income from legitimately acquired property and, being the undisputed coconut
king, with unlimited powers to deal with the coconut levy funds; that Cojuangco enjoyed the privilege of appointing his nominees to the SMC Board, to
which he appointed key members of the ACCRA Law Firm instead of coconut farmers whose money really funded the sale. Cojuanco, et al. plotted, devised,
schemed, conspired and confederated with each other in setting up, through the use of coconut levy funds, the financial and corporate framework and
structures that led to the establishment of UCPB, UNICOM, COCOLIFE, COCOMARK. CIC, and more than 20 other coconut levy-funded corporations.
However, ACCRA Law Firm was excluded in the case by virtue of an SC decision.

After submission of various pleadings, the Sandiganbayan, in order to conform with the ruling in Presidential Commission on Good Government v. Cojuangco,
et al., granted COCOFED ’s Omnibus Motion (with prayer for preliminary injunction) relative to who should vote the UCPB shares under sequestration. But,
when the Republic filed a Motion for Judgment on the Pleadings and/or for Partial Summary Judgment, the Sandiganbayan granted it as to the CIIF Block of shares.

During the pendency of the Republic’s motion for execution on the CIIF block of shares, Cojuangco, et al. filed a Motion for Authority to Sell San
Miguel Corporation (SMC) shares, praying for leave to allow the sale of SMC shares to proceed. The Sandiganbayan granted. Cojuangco, et al. manifested to the
Sandiganbayan that the shares would be sold to the San Miguel Corporation Retirement Plan. The Sandiganbayan allowed the sale of the shares provided that

26
Cojuanco, et al. hold themselves liable to their transferees-buyers, especially if they are buyers in good faith and for value. Cojuangco, et al. later rendered a
complete accounting of the proceeds from the sale of the Cojuangco block of shares of SMC stock, informing that a total amount of P 4,786,107,428.34 had
been paid to the UCPB as loan repayment.

In its last attempt to pin Cojuanco, the Republic’s lack of proof on the source of the funds by which Cojuangco, et al. had acquired their block of
SMC shares has made it shift its position, that it now suggests that Cojuangco had been enabled to obtain the loans by the issuance of LOI 926 exempting
the UCPB from the DOSRI and the Single Borrowers Limit restrictions.

ISSUES:
3. Were 9 writs of sequestration (WOS) lifted with grave abuse of discretion?
4. Did the Republic adduce sufficient evidence to substantiate its allegations against Cojuanco, et al., warranting summary judgment?
5. Did LOI 926, exempting the UCPB from the DOSRI and the Single Borrowers Limit restrictions, invalid, which also makes Cojuanco’s
loan before the UCPB invalid?

RULING:

1. NO. The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably, a fatal defect which rendered the
sequestration of respondent corporation and its properties void ab initio.

Plainly enough, the irregularities infirming the issuance of the several WOS could not be ignored in favor of the Republic and resolved against the
persons whose properties were subject of the WOS. Where the Rules of the PCGG instituted safeguards under Section 3, by requiring the concurrent
signatures of two Commissioners to every WOS issued and the existence of a prima facie case of ill-gotten wealth to support the issuance, the non-compliance
with either of the safeguards nullified the WOS thus issued. It is already settled that sequestration, due to its tendency to impede or limit the exercise of
proprietary rights by private citizens, is construed strictly against the State, conformably with the legal maxim that statutes in derogation of common rights
are generally strictly construed and rigidly confined to the cases clearly within their scope and purpose.

Nor did the Sandiganbayan gravely abuse its discretion in reducing from four to only two the conditions imposed for the lifting of the WOS. The
Sandiganbayan thereby acted with the best of intentions, being all too aware that the claim of the Republic to the sequestered assets and properties might be
prejudiced or harmed pendente lite unless the protective conditions were annotated in the corporate books of SMC. Moreover, the issue became academic
following the Sandiganbayan’s promulgation of its decision dismissing the Republic’s Amended Complaint, which thereby removed the stated reason the Republic
continues to hold a claim on the shares which is yet to be resolved underlying the need for the annotation of the conditions (whether four or two).

2. NO. The Republic did not discharge its burden as plaintiff to establish by preponderance of evidence that the Cojuanco, et al.’s SMC shares were illegally
acquired with coconut-levy funds.

Even assuming that, as the Republic prayed for, the Court takes judicial notice of the evidence it offered with respect to the Cojuangco block of
SMC shares of stock, as contained in the Republic’s manifestation of purposes, still its evidence do not suffice to prove the material allegations in the
complaint that Cojuangco took advantage of his positions in UCPB and PCA in order to acquire the said shares. Besides, the Court found that there are
genuine factual issues raised by Cojuanco, et al. that need to be threshed out in a full-blown trial, and which plaintiff had the burden to substantially prove,
such as sources of funds, determination of whether the funds acquired from alleged various sources can be considered coconut levy funds, proof that
Cojuangco was serving the government at the time the funds used to purchase the SMC shares were obtained, and the he took advantage of his position and
close ties with then President Marcos.

It was plain, indeed, that Cojuangco, et al. had tendered genuine issues through their responsive pleadings and did not admit that the acquisition
of the Cojuangco block of SMC shares had been illegal, or had been made with public funds. As a result, the Republic needed to establish its allegations with
preponderant competent evidence, because, as earlier stated, the fact that property was ill gotten could not be presumed but must be substantiated with
competent proof adduced in proper judicial proceedings.

With the Republic nonetheless choosing not to adduce evidence proving the factual allegations, particularly the aforementioned matters, and
instead opting to pursue its claims by Motion for Summary Judgment, the Sandiganbayan became completely deprived of the means to know the necessary but
crucial details of the transactions on the acquisition of the contested block of shares. The Republic’s failure to adduce evidence shifted no burden to Cojuanco,
et al. to establish anything, for it was basic that the party who asserts, not the party who denies, must prove. Thus, the Sandiganbayan correctly dismissed the
civil case for failure of the Republic to prove its case by preponderant evidence.

3. NO. Firstly, as earlier pointed out, the Republic adduced no evidence on the significant particulars of the supposed loan, like the amount,
the actual borrower, the approving official, etc. It did not also establish whether or not the loans were DOSRI or issued in violation of the Single
Borrowers Limit. Secondly, the Republic could not outrightly assume that President Marcos had issued LOI 926 for the purpose of allowing the
loans by the UCPB in favor of Cojuangco. There must be competent evidence to that effect. And, finally, the loans, assuming that they were of
a DOSRI nature or without the benefit of the required approvals or in excess of the Single Borrowers Limit, would not be void for that reason.
Instead, the bank or the officers responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law.

PHILIPPINE AMANAH BANK (NOW AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILIPPINES, ALSO KNOWN AS
ISLAMIC BANK), Petitioner, vs. EVANGELISTA CONTRERAS, Respondent. [G.R. No. 173168, September 29, 2014, BRION, J . ]

Any private arrangement between Calinico and the respondent regarding the proceeds of the loan was not the concern of the petitioner bank, as it was not a privy to this agreement. If
Calinico violated the terms of his agreement with the respondent on the turn-over of the proceeds of the loan, then the latter's proper recourse was to file the appropriate criminal action
in court.

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Finally, we point out that the petitioner bank is a government owned or controlled corporation. While OCT No. P-2034 (issued in favor of Calinico by virtue of the deed of confirmation
of sale) contained a prohibition against the alienation and encumbrance of the subject land within five (5) years from the date of the patent, the CA failed to mention that by the express
wordings of the OCT itself, the prohibition does not cover the alienation and encumbrance "in favor of the Government or any of its branches, units or institutions."

Evangelista Contreras, the respondent, filed a complaint for annulment of real estate mortgage, cancellation of original certificate of title,
reconveyance, recovery of possession and damages before the RTC. The respondent alleged that he was the owner of a 640 square meter cadastral lot located
in Cagayan de Oro City. Respondent went to the house of his brother-in-law, Calinico Ilogon, to seek assistance in obtaining a loan from the petitioner bank
since Calinico is a friend of the bank’s Chief of the Loan Division. Calinico told the respondent that the petitioner bank could grant a loan up to P200,000.00
if the subject property would be titled.

Subsequently, respondent and Calinico, upon the suggestion of the Chief of the petitioner bank’s Loan Division, entered into a Deed of
Confirmation of Sale under which they transferred the title of the land to Calinico who, in turn, mortgaged it to the petitioner bank. Calinico and the
respondent then executed an Agreement stating, among others, that the deed of sale they executed was for the purpose of securing a loan with the petitioner
bank.

The respondent wrote a letter and went to the petitioner bank directing the latter’s manager not to release the loan to Calinico. However, on the
next day, he was informed that the loaned amount had already been given to Calinico earlier that morning

That petitioner bank subsequently extrajudicially foreclosed the mortgage due to the Ilogon spouses’ failure to pay the loan. The mortgaged
property was sold at public auction to the petitioner bank as the highest bidder. Thereafter, the Certificate of Sale was issued in favor of the petitioner bank.

The mortgagor failed to redeem the mortgaged property within the period prescribed by law, thus, the title to the property was consolidated in
the petitioner bank's name. Consequently, Original Certificate of Title was cancelled and Transfer Certificate of Title was issued in the petitioner bank's
name.

RTC dismissed the complaint for lack of merit. It held that the petitioner bank was not aware of the agreement between the respondent and the
Ilogon spouses, and that the respondent failed to present any evidence as basis to annul the mortgage contract.

RTC’s decision became final and executory. Accordingly, respondent filed a petition for relief. Respondent claimed that the petitioner bank was
not a lender in good faith since it knew that the mortgaged land was not owned by the Ilogon spouses. He added that the petitioner bank and the Ilogon
spouses connived with each other to release the loan to Calinico.

RTC denied the said petition for relief for being filed out of time. On appeal, CA set aside RTC’s decision, declaring the real estate mortgage as
null and void. According to the CA, the petitioner bank knew that there were conflicting claims over the land, and that the OCT of this land carried a
prohibition of any encumbrance on the lot for five (5) years. It added that the petitioner bank failed to exercise diligence in ascertaining the ownership of
the land, and ignored the respondent’s representations that Calinico’s title was defective and was only for loan purposes. Thus, this petition for review on
certiorari. In the said petition, the bank maintained that it is exempted from the 5-year prohibitory period since it is a Government branch, unit or institution.

ISSUE: Is the real estate mortgage valid?

RULING: YES.

We are aware of the rule that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving
registered lands, since their business is impressed with public interest. The rule that persons dealing with registered lands can rely solely on the certificate of
title does not apply to banks. Simply put, the ascertainment of the status or condition of a property offered to it as security for a loan must be a standard
and indispensable part of a bank’s operations.

In the present case, however, nothing in the documents presented by Calinico would arouse the suspicion of the petitioner bank to prompt a more
extensive inquiry. When the Ilogon spouses applied for a loan, they presented as collateral a parcel of land evidenced by OCT No. P-2034 issued by the
Office of the Register of Deeds of Cagayan de Oro, and registered in the name of Calinico. This document did not contain any inscription or annotation
indicating that the respondent was the owner or that he has any interest in the subject land. In fact, the respondent admitted that there was no encumbrance
annotated on Calinico’s title at the time of the latter’s loan application. Any private arrangement between Calinico and the respondent regarding the
proceeds of the loan was not the concern of the petitioner bank, as it was not a privy to this agreement. If Calinico violated the terms of his
agreement with the respondent on the turn-over of the proceeds of the loan, then the latter's proper recourse was to file the appropriate criminal
action in court.

The respondent also failed to prove its allegation that the petitioner bank knew, thru a letter sent by the former’s lawyer, Atty. Crisanto Mutya, Jr.,
that the sale of the subject land between him and Calinico was made only for loan purposes, and that failure of Calinico to turn over the proceeds of the
loan will invalidate the sale. In his testimony, the respondent admitted that it was his son who gave the letter to the manager of the petitioner bank. Corollarily,
the respondent’s son was never presented in court. Even assuming, for the sake of argument, that the petitioner bank received a copy of Atty. Mutya’s letter,
it was still well-within its discretion to grant or deny the loan application after evaluating the documents submitted for loan applicant. As earlier stated,
OCT No. P-2034 issued in Calinico’s favor was free from any encumbrances. The petitioner bank is not anymore privy to whatever arrangements
the owner entered into regarding the proceeds of the loan.

Finally, we point out that the petitioner bank is a government owned or controlled corporation. While OCT No. P-2034 (issued in favor
of Calinico by virtue of the deed of confirmation of sale) contained a prohibition against the alienation and encumbrance of the subject land

28
within five (5) years from the date of the patent, the CA failed to mention that by the express wordings of the OCT itself, the prohibition does
not cover the alienation and encumbrance "in favor of the Government or any of its branches, units or institutions."

29