1Bank-Notes 44696336 (adopted)

7/22/2019 1Bank-Notes 44696336 (adopted)

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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BANKING LAW I

I. GENERAL CONCEPTS

A. CONCEPT OF BANKINGa. Definition: Banks shall refer to entities engaged in the lending of

funds obtained in the form of deposits (Sec. 3.1, GBL)

b. Elements:i. Engaged in lending of funds

ii. Obtained in the form of depositsiii. From the public, which shall mean 20 or more persons

(Sec. 8.2, GBL)

REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19SCRA 58 (1967)

DOCTRINE: A bank is a moneyed institute founded to facilitate theborrowing, lending and safekeeping of money and to deal in notes, bills ofexchange and credits. An investment company, which lends out the money

of its customers, collects the interest and charges a commission to bothlender and borrower, is a bank.

FACTS

This is a quo warranto proceeding, initiated by the Solicitor General, todissolve the Security and Acceptance Corporation for allegedly engaging inbanking operations without the authority required therefor by the GeneralBanking Act (Republic Act No. 337).

Security Credit and Acceptance Corporation is a duly registered corporationwith the SEC. Its articles of incorporation authorize it to o engage primarilyin financing agricultural, commercial and industrial projects, andsecondarily, in buying and selling stocks and bonds of any corporation.

The Superintend of Banks of the Central Bank of the Philippines thru its legalcounsel rendered an opinion that Security Credit and AcceptanceCorporation is a banking institution within the purview of Republic Act No.337. Central Bank advised the corporation to comply with the requirementsof the General Banking Act.

Notwithstanding, the corporation, as well as the members of its Board ofDirectors and the officers of the corporation, continued performing thefunctions and activities which had been declared to constitute illegal bankingoperations; the corporation established 74 branches in principal cities andtowns throughout the Philippines; that through a systematic and vigorous

campaign undertaken by the corporation, the same had managed to inducethe public to open 59,463 savings deposit accounts.

ISSUEWhether the corporation is engaged in banking

RULING

YES. It is clear that these transactions partake of the nature of banking, asthe term is used in Section 2 of the General Banking Act. Indeed, a bankhas been defined as:

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

Moreover, it has been held that:

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

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

Accordingly, defendant-corporation has violated the law by engaging inbanking without securing the administrative authority required in RepublicAct No. 337.

That the illegal transactions thus undertaken by defendant corporationwarrant its dissolution is apparent from the fact that the foregoing misuserof the corporate funds and franchise affects the essence of its business, thatit is willful and has been repeated 59,463 times, and that its continuanceinflicts injury upon the public, owing to the number of persons affectedthereby.

CENTRAL BANK v MORFE, 20 SCRA 507 (1967)

DOCTRINE: The law requiring compliance with certain requirements beforeanybody can engage in banking obviously seeks to protect the public againstactual, as well as potential, injury.


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FACTS

First Mutual Savings and Loan Organization (Organization) is a registerednon-stock corporation, whose main purpose is to encourage x x x andimplement savings and thrift among its members, and to extend financialassistance in the form of loans to them.

In 1962, the Central Bank Legal Department rendered an opinion finding theOrganization as a banking institution, falling within the purview of the

Central Bank Act. Hence, it applied for a search warrant with the MunicipalCourt of Manila against the Organization, alleging that it was engaged inillegal banking activities, by receiving deposits of money for deposit,disbursement, safekeeping or otherwise or transacts the business of asavings and mortgage bank and/or building and loan association x x xwithout having first complied with the provisions of RA 337.

Judge Cancino issued the warrant applied for there being good andsufficient reasons to believe that the Organization has under its control thearticles/items subject of the offense complained of. On the same day, theOrganization commenced an action with the CFI of Manila against theMunicipal Court, the sheriff, the Manila Police Department and the CentralBank to annul the search warrant on the ground that it was issued withGADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order infavor of the Organization.

Accordingly, the Bank moved for reconsideration but was denied andcommenced the present action.

ISSUEWhether the Organization is a banking institution within the purview of theCentral Bank Act

RULINGYES.The records suggested clearly that the transactions objected to by the

Central Bank constitute the general pattern of the business of theOrganization. Indeed, the main purpose thereof, according to its By-Laws, is

to extend financial assistance, in the form of loans, to its members, withfunds deposited by them.

It is true that such funds are referred to as their savings and that thedepositors thereof are designated as members, but, even a cursoryexamination of said documents will readily show that anybody can be adepositor and thus be participating member. In other words, theOrganization is open to the public for deposit accounts, and the funds soraised may be lent by the Organization.

Moreover, the power to dispose of said funds is placed under the exclusive

authority of the founding members, and participating members are

expressly denied the right to vote or be voted for, their privileges andbenefits being limited to those, which the BoT may in its discretion,determine from time to time. Thus, the membership of the participatingmembers is purely nominal in nature. This situation is fraught, precisely,with the very dangers or evils, which RA 337 seeks to forestall, by exactingcompliance with the requirements of said Act, before the transactions inquestion could be undertaken.

BANAS v ASIA PACIFIC FINANCE CORPORATION, 343 SCRA 527(2000)

DOCTRINE: An investment company refers to any issuer, which is or holdsitself out as being engaged or proposes to engage primarily in the businessof investing, reinvesting or trading in securities. What is prohibited by law isfor investment companies to lend funds obtained from the public throughreceipts of deposit, which is a function of banking institutions.

FACTSTeodoro Banas issued a Promissory Note(P.N.), amounting to 390k payablein installments, in favor of C. G. Dizon Construction. Later, DizonConstruction endorsed the P.N to Asia Pacific Finance Corporation, aninvestment house. As security for the endorsement, Dizon Constructionmade a Chattel Mortgage over 3 heavy equipment units. As additionalsecurity, Cenen Dizon, president of Dizon Construction, executed aContinuing Undertaking, bounding himself to pay the obligation jointly andseverally.

At first, Dizon Construction complied with the installments. However, itdefaulted in its payment of the remaining installments. Asia Pacific suedBanas and Dizon Construction for payment of the P.N.. Banas and DizonConstruction argue that the transaction was never intended to be legal but asubterfuge to conceal the loan of 390k with usurious interest. They bothclaim that Asia Pacific proposed the scheme with them involved because

Asia Pacific could not engage in banking business.

RTC ruled in favor of Asia Pacific. CA affirmed the decision.

ISSUEWhether the transaction violated banking laws, hence null and void

RULING

NO, it did not violate banking laws.

An investment company refers to any issuer which is or holds itself out asbeing engaged or proposes to engage primarily in the business of investing,reinvesting or trading in securities. securities include commercial papers

evidencing indebtedness of any person, financial or non-financial entity,


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irrespective of maturity, issued, endorsed, sold, transferred or in anymanner conveyed to another with or without recourse, such as promissorynotes. The transaction between the two was a purchase of receivables at adiscount and not a loan. Such act is within the purview of the functions of aninvestment company.

Moreover, Sec 2 of the General Banking Act provides,

Sec. 2. Only entities duly authorized by the Monetary Board of theCentral Bank may engage in the lending of funds obtained from thepublic through the receipt of deposits of any kind, and all entitiesregularly conducting such operations shall be considered as bankinginstitutions and shall be subject to the provisions of this Act, of theCentral Bank Act, and of other pertinent laws

What is prohibited by law is for investment companies to lend fundsobtained from public through receipts of deposit. However, the fundsobtained by Asia Pacific have not been shown to have been obtained fromthe public through deposits. Thus, no banking laws were violated.

Upon further inspection of the 3 documents (Promissory Note / ChattelMortgage / Continuing Undertaking) , the documents failed to prove thetheory that the transaction was a loan. Petitioners are still liable for theunpaid balance of the P.N.

B. BANKING DISTINGUISHED FROM QUASI-BANKINGa. Elements of Quasi-Banking: "Quasi-Banks" shall refer to

entities engaged in the borrowing of funds through the issuance,endorsement or assignment with recourse or acceptance ofdeposit substitutes as defined in Section 95 of Republic Act No.7653 (hereafter the "New Central Bank Act") for purposes ofrelending or purchasing of receivables and other obligations(Sec. 4, Par. 3, GBL)

i. Borrowing of funds for borrowers own accountii. From 20 or more lenders at any one timeiii. Through issuance, endorsement or assignment with recourse

of acceptance of deposit substitutes (Sec. 95, NCBA)iv. For purposes of relending or purchasing of receivables and

other obligations

b. Requirement of Separate License: No person or entity shallengage in banking operations or quasi-banking functions withoutauthority from the Bangko Sentral: Provided, however, That anentity authorized by the Bangko Sentral to perform universal orcommercial banking functions shall likewise have the authority toengage in quasi-banking functions.

The determination of whether a person or entity is performingbanking or quasi-banking functions without Bangko Sentralauthority shall be decided by the Monetary Board. To resolve suchissue, the Monetary Board may, through the appropriatesupervising and examining department of the Bangko Sentral,examine, inspect or investigate the books and records of such

person or entity. Upon issuance of this authority, such person orentity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authorityis sooner surrendered, revoked, suspended or annulled by theBangko Sentral in accordance with this Act or other special laws (Sec. 6, Par. 1-2, GBL)

C. BANKS DISTINGUISHED FROM OTHER FINANCIALINSTITUTIONSa. Investment Houses: Sec. 2-3, PD 129

Section 2. Scope. Any enterprise, which engages in theunderwriting of securities of other corporations, shall beconsidered an "Investment House" and shall be subject to theprovisions of this Decree and of other pertinent laws.

Nothing in this Decree shall be understood to preclude otherenterprises from engaging in the mere buying and selling ofshort-term securities of other persons or enterprises.

Section 3.Definitions.For the purpose of this Decree, unless thecontext otherwise indicates, the following definition of terms arehereby adopted:

(a) "Underwriting" is the act or process of guaranteeing thedistribution and sale of securities of any kind issued byanother corporation.

(b) "Securities" are written evidences of ownership, interest,or participation, in an enterprise, or written evidences ofindebtedness of a person or enterprise. It includes, but isnot limited to the instruments enumerated in Section 2 ofthe Securities Act (Commonwealth Act No. 83, as amended).

b. Financing Companies: "Financing companies," hereinaftercalled companies, are corporations, or partnerships, except thoseregulated by the Central Bank of the Philippines, the InsuranceCommissioner and the Cooperatives Administration Office, whichare primarily organized for the purpose of extending creditfacilities to consumers and to industrial, commercial, or

agricultural enterprises, either by discounting or factoring


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commercial papers on accounts receivable, or by buying andselling contracts, leases, chattel mortgages, or other evidences ofindebtedness, or by leasing of motor vehicles, heavy equipmentand industrial machinery, business and office machine andequipment, appliances and other movable property (Sec. 3(a),RA 5980, as amended by RA 8556)

c. Investment Companies: "Investment Company" means anyissuer which is or holds itself out as being engaged primarily, orproposes to engage primarily, in the business of investing,reinvesting, or trading in securities(Sec. 4, RA 2629)

d. Non-Stock Savings and Loans Associations: Non-stocksavings and loan association shall mean a non-stock, non-profitcorporation engaged in the business of accumulating the savingsof its members and using such accumulations for loans tomembers to service the needs of households by providing longterm financing for home building and development and forpersonal finance (Sec. 3, RA 8367)

e. Cooperatives: A cooperative is a duly registered association ofpersons, with a common bond of interest, who have voluntarily

joined together to achieve a lawful common social or economicend, making equitable contributions to the capital required andaccepting a fair share of the risks and benefits of the undertakingin accordance with universally accepted cooperative principles(Art. 3, RA 6938)

A cooperative bank is one organized by the majority shares ofwhich is owned and controlled by cooperatives primarily toprovide financial and credit services to cooperatives. The term"cooperative bank" shall include cooperative rural banks (Art.100, RA 6983)

f. Insurance Companies:The term "doing an insurance business"or "transacting an insurance business", within the meaning of thisCode, shall include (a) making or proposing to make, as insurer,any insurance contract; (b) making or proposing to make, assurety, any contract of suretyship as a vocation and not asmerely incidental to any other legitimate business or activity ofthe surety; (c) doing any kind of business, including areinsurance business, specifically recognized as constituting thedoing of an insurance business within the meaning of this Code;(d) doing or proposing to do any business in substanceequivalent to any of the foregoing in a manner designed to evadethe provisions of this Code(Sec. 2, PD 612)

g. Pawnshops: "Pawnshop" shall refer to a person or entityengaged in the business of lending money on personal propertydelivered as security for loans and shall be synonymous, and maybe used interchangeably, with pawnbroker or pawnbrokerage(Sec. 3, PD 114)

FIRST PLANTERS PAWNSHOP, INC. v CIR, 560 SCRA 606 (2008)

DOCTRINE: A pawnshop's business and operations are governed byPresidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act andCentral Bank Circular No. 374 (Rules and Regulations for Pawnshops).Section 3 of P.D. No. 114 defines pawnshop as a person or entity engagedin the business of lending money on personal property delivered as securityfor loans and shall be synonymous, and may be used interchangeably, withpawnbroker or pawn brokerage.

That pawnshops are to be treated as non-bank financial intermediaries isfurther bolstered by the fact that pawnshops are under the regulatorysupervision of the Bangko Sentral ng Pilipinas and covered by its Manual ofRegulations for Non-Bank Financial Institutions.

FACTS

!n a Pre-Assessment Notice, petitioner was informed by the BIR that it has

an existing tax deficiency on its VAT and DST liabilities for the year2000. The deficiency assessment was at P541,102.79 for VATand P23,646.33 for DST. Petitioner protested the assessment for lack oflegal and factual bases. Petitioner subsequently received a FormalAssessment Notice, directing payment of VAT deficiency in the amountof P541,102.79 and DST deficiency in the amount of P24,747.13, inclusiveof surcharge and interest. Petitioner filed another protest but was denied.Petitioner then filed a petition for review with the Court of Tax Appeals(CTA) but it was denied. Petitioner later sought reconsideration from theCTA En Banc but was still denied thus this case.

First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau ofInternal Revenue (BIR) for the year 2000. The core of petitioner's argumentis that it is not a lending investor within the purview of Section 108(A) ofthe National Internal Revenue Code (NIRC), as amended, and therefore notsubject to value-added tax (VAT). Petitioner also contends that a pawnticket is not subject to documentary stamp tax (DST) because it is not proofof the pledge transaction, and even assuming that it is so, still, it is notsubject to tax since a documentary stamp tax is levied on the documentissued and not on the transaction.


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ISSUE

Whether Petitioner is liable for the assessed VAT and DST deficiency

RULINGThe tax liability shall be based on the tax treatment of pawnshops. TheCourt has ruled that they shall be treated as non-bank financialintermediaries and reasons as follows:

R.A. No. 337, as amended, or the General Banking Act characterizes theterms banking institution and bank as synonymous and interchangeable andspecifically include commercial banks, savings bank, mortgage banks,development banks, rural banks, stock savings and loan associations, andbranches and agencies in the Philippines of foreign banks. R.A. No. 8791 orthe General Banking Law of 2000, meanwhile, provided that banks shallrefer to entities engaged in the lending of funds obtained in the form ofdeposits. R.A. No. 8791 also included cooperative banks, Islamic banks andother banks as determined by the Monetary Board ofthe Bangko Sentral ng Pilipinas in the classification of banks.

Financial intermediaries, on the other hand, are defined as persons orentities whose principal functions include the lending, investing orplacement of funds or evidences of indebtedness or equity deposited withthem, acquired by them, or otherwise coursed through them, either for theirown account or for the account of others.

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

A pawnshop's business and operations are governed by Presidential Decree(P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank CircularNo. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114definespawnshop as a person or entity engaged in the business of lending

money on personal property delivered as security for loans and shall besynonymous, and may be used interchangeably, with pawnbroker or pawnbrokerage.

That pawnshops are to be treated as non-bank financial intermediaries isfurther bolstered by the fact that pawnshops are under the regulatorysupervision of theBangko Sentral ng Pilipinas and covered by its Manual ofRegulations for Non-Bank Financial Institutions. The Manual includespawnshops in the list of non-bank financial intermediaries,

Coming now to the issue at hand - Since petitioner is a non-bank financialintermediary, it is subject to 10% VAT for the tax years 1996 to2002; however, with the levy, assessment and collection of VAT from non-

bank financial intermediaries being specifically deferred by law,[34] then

petitioner is not liable for VAT during these tax years. But with the fullimplementation of the VAT system on non-bank financial intermediariesstarting January 1, 2003, petitioner is liable for 10% VAT for said taxyear. 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 ongross receipts from 0% to 5 %, as the case may be.

Regarding the liability on DST, the court ruled that petitioner is liable for

said tax. The Court has settled this issue in Michel J. Lhuillier Pawnshop,Inc. v. Commissioner of Internal Revenue, in which it was ruled that thesubject of DST is not limited to the document alone. Pledge, which is anexercise of a privilege to transfer obligations, rights or properties incidentthereto, is also subject to DST.

In the instant case, there is no law specifically and expressly exemptingpledges entered into by pawnshops from the payment of DST. Section 199of the NIRC enumerated certain documents, which are not subject to stamptax; but a pawnshop ticket is not one of them. Hence, petitioners nebulousclaim that it is not subject to DST is without merit.

D.NATURE OF BANKING BUSINESSThe State recognizes the vital role of banks in providing anenvironment conducive to the sustained development of the nationaleconomy and the fiduciary nature of banking that requires highstandards of integrity and performance. In furtherance thereof, theState shall promote and maintain a stable and efficient banking andfinancial system that is globally competitive, dynamic and responsiveto the demands of a developing economy (Sec. 2, GBL)

a. Vital Role in EconomySIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992)

DOCTRINE: As a business affected with public interest and because of thenature of its functions, the bank is under obligation to treat the accounts ofits depositors with meticulous care, always having in mind the fiduciarynature of their relationship.

FACTS

Simex was a food exporter that drew stock in the Philippines then sold itabroad. It deposited 100k in Traders Royal Bank , raising the balance toP190,380.74, then later issued checks that were suddenly dishonored California Manufacturing and others issued demand letters for thedishonored check. Simexs credit line was canceled because of thedishonored check Traders bank said the deposit of 100k was not credited,the error was rectified but Simex filed a case against the bank and

demanded reparation for gross and wanton negligence: not met complaint


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for 1m moral and 500k exemplary damages + 25% atty. fees and costs CFI: moral and exemplary damages not called for, but nominal damages20k plus 5k atty. fees affirmed by CA

ISSUEWas there Gross negligence in not crediting the deposit?RULINGYES. Banking system: indispensable institution in modern world; plays vital

role in economic life of every civilized nation. Trusted and active associate depositor expects bank to treat account with utmost fidelity, must recordeach transaction accurately Fiduciary nature of relationship Traders wasremiss in duty 20k moral damages, 50k exemplary (by way of example orcorrection for the public good)

Subject to Reasonable Regulation by the StateCENTRAL BANK OF THE PHILIPPINES v CA, 208 SCRA 652 (1992)

DOCTRINE: It is the Governments responsibility to see to it that thefinancial interests of those who deal with banks and banking institutions, asdepositors or otherwise, are protectedthis task is delegated to the CentralBank, which is authorized to administer monetary, banking and creditsystem in the Philippines.

FACTSDuring the regular examination of the Producers Bank of the Philippines,Central Bank examiners stumbled upon some highly questionable loanswhich had been extended by the PBP management to several entities. Uponfurther examination, it was discovered that these loans, totallingapproximately P300 million, were "fictitious" as they were extended, withoutcollateral, to certain interests related to PBP owners themselves. Said loanswere deemed to be anomalous particularly because the total paid-in capitalof PBP at that time was only P 140.544 million. This means that the entirepaid-in capital of the bank, together with some P160 million of depositors'

money, was utilized by PBP management to fund these unsecured loans.

Several blind items about a family-owned bank in Binondo which grantedfictitious loans to its stockholders appeared in major newspapers. Thesenews items triggered a bank-run in PBP which resulted in continuous over-drawings on the bank's demand deposit account with the Central Bank.

The Monetary Board (MB), pursuant to its authority under Section 28-A ofR.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBPunder conservatorship.

The Monetary Board gave PBP several opportunities to submit a viablerehabilitation plan in order to salvage the bank and lift the conservatorship.

PBP failed to respond to the notices of the Monetary Board, hence the

conservatorship was maintained.

Later on, PBP filed an action for damages against CB and MB. The suitprayed for the lifting of the conservatorship and payment of damagesallegedly suffered by PBP due to the malicious and untimely declaration ofconservatorship. It also prayed for a preliminary injunction /TRO against theconservatorship. RTC granted the injunction.ISSUE

Whether the conservatorship was proper

HELD

YES. It must be stressed in this connection that the banking business isproperly subject to reasonable regulation under the police power of the statebecause of its nature and relation to the fiscal affairs of the people and therevenues of the state. 55 Banks are affected with public interest becausethey receive funds from the general public in the form of deposits. Due tothe nature of their transactions and functions, a fiduciary relationship iscreated between the banking institutions and their depositors. Therefore,banks are under the obligation to treat with meticulous care and utmostfidelity the accounts of those who have reposed their trust and confidence inthem.

It is then Government's responsibility to see to it that the financial interestsof those who deal with banks and banking institutions, as depositors orotherwise, are protected. In this country, that task is delegated to theCentral Bank which, pursuant to its Charter, 57 is authorized to administerthe monetary, banking and credit system of the Philippines. Under both the1973 and 1987 Constitutions, the Central Bank is tasked with providingpolicy direction in the areas of money, banking and credit; corollarily, it shallhave supervision over the operations of banks. 58 Under its charter, the CBis further authorized to take the necessary steps against any bankinginstitution if its continued operation would cause prejudice to its depositors,creditors and the general public as well. This power has been expressly

recognized by this Court. In Philippine Veterans Bank Employees Union-NUBE vs. Philippine Veterans Bank, 59 this Court held that:. . . Unless adequate and determined efforts are taken by thegovernment against distressed and mismanaged banks, public faithin the banking system is certain to deteriorate to the prejudice ofthe national economy itself, not to mention the losses suffered bythe bank depositors, creditors, and stockholders, who all deservethe protection of the government. The government cannot simplycross its arms while the assets of a bank are being depleted throughmismanagement or irregularities. It is the duty of the Central Bankin such an event to step in and salvage the remaining resources ofthe bank so that they may not continue to be dissipated orplundered by those entrusted with their management.


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Strikes and LockoutsThe banking industry is hereby declared as indispensable to the nationalinterest and, not withstanding the provisions of any law to the contrary, anystrike or lockout involving banks, if unsettled after seven (7) calendar daysshall be reported by the Bangko Sentral to the Secretary of Labor who mayassume jurisdiction over the dispute or decide it or certify the same to theNational Labor Relations Commission for compulsory arbitration. However,the President of the Philippines may at any time intervene and assume

jurisdiction over such labor dispute in order to settle or terminate the same(Sec. 22, GBL)

When, in his opinion, there exists a labor dispute causing or likely to cause astrike or lockout in an industry indispensable to the national interest, theSecretary of Labor and Employment may assume jurisdiction over thedispute and decide it or certify the same to the Commission for compulsoryarbitration. Such assumption or certification shall have the effect ofautomatically enjoining the intended or impending strike or lockout asspecified in the assumption or certification order. If one has already takenplace at the time of assumption or certification, all striking or locked outemployees shall immediately return-to-work and the employer shallimmediately resume operations and readmit all workers under the sameterms and conditions prevailing before the strike or lockout. The Secretaryof Labor and Employment or the Commission may seek the assistance oflaw enforcement agencies to ensure compliance with this provision as wellas with such orders as he may issue to enforce the same.

In line with the national concern for and the highest respect accorded to theright of patients to life and health, strikes and lockouts in hospitals, clinicsand similar medical institutions shall, to every extent possible, be avoided,and all serious efforts, not only by labor and management but governmentas well, be exhausted to substantially minimize, if not prevent, their adverseeffects on such life and health, through the exercise, however legitimate, bylabor of its right to strike and by management to lockout. In labor disputes

adversely affecting the continued operation of such hospitals, clinics ormedical institutions, it shall be the duty of the striking union or locking-outemployer to provide and maintain an effective skeletal workforce of medicaland other health personnel, whose movement and services shall beunhampered and unrestricted, as are necessary to insure the proper andadequate protection of the life and health of its patients, most especiallyemergency cases, for the duration of the strike or lockout. In such cases,therefore, the Secretary of Labor and Employment may immediatelyassume, within twenty four (24) hours from knowledge of the occurrence ofsuch a strike or lockout, jurisdiction over the same or certify it to theCommission for compulsory arbitration. For this purpose, the contendingparties are strictly enjoined to comply with such orders, prohibitions and/orinjunctions as are issued by the Secretary of Labor and Employment or the

Commission, under pain of immediate disciplinary action, including dismissal

or loss of employment status or payment by the locking-out employer ofbackwages, damages and other affirmative relief, even criminal prosecutionagainst either or both of them.

The foregoing notwithstanding, the President of the Philippines shall not beprecluded from determining the industries that, in his opinion, areindispensable to the national interest, and from intervening at any time andassuming jurisdiction over any such labor dispute in order to settle or

terminate the same (Art. 263 (g), Labor Code)

b. Fiduciary Nature of Banking Businessi. Degree of Diligence Required

SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992)

DOCTRINE: As a business affected with public interest and because of thenature of its functions, the bank is under obligation to treat the accounts ofits depositors with meticulous care, always having in mind the fiduciarynature of their relationship.

FACTSSimex was a food exporter that drew stock in the Philippines then sold itabroad. It deposited 100k in Traders Royal Bank , raising the balance toP190,380.74, then later issued checks that were suddenly dishonored California Manufacturing and others issued demand letters for thedishonored check. Simexs credit line was canceled because of thedishonored check Traders bank said the deposit of 100k was not credited,the error was rectified but Simex filed a case against the bank anddemanded reparation for gross and wanton negligence: not met complaintfor 1m moral and 500k exemplary damages + 25% atty. fees and costs CFI: moral and exemplary damages not called for, but nominal damages20k plus 5k atty. fees affirmed by CA

ISSUEWas there Gross negligence in not crediting the deposit?

RULING

YES. Banking system: indispensable institution in modern world; plays vitalrole in economic life of every civilized nation. Trusted and active associate depositor expects bank to treat account with utmost fidelity, must recordeach transaction accurately Fiduciary nature of relationship Traders wasremiss in duty 20k moral damages, 50k exemplary (by way of example orcorrection for the public good)


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BANK OF THE PHILIPPINE ISLANDS v IAC, 206 SCRA 408 (1992)

DOCTRINE: The is no merit in the argument that a bank should not beconsidered negligent, much less held liable for damages on account of theinadvertence of its bank employees for Article 1173 of the Civil Code onlyrequires it to exercise the diligence of a good father of the family.

While the banks negligence may not have been attended with malice and

bad faith, nevertheless, it caused serious anxiety, embarrassment andhumiliation to the depositors for which they are entitled to reasonable moraldamages.

FACTSThe spouses Arthur and Vivienne Canlas opened a joint account in CBTCQ.C. with an initial deposit of P2,250. Before that, Arthur Canlas had anexisting separate personal checking account there.

When they opened this account, the "new accounts" teller of the bank pulledout from the bank's files the old signature card of Arthur Canlas for use as ID and reference. By mistake, she placed the old personal account number ofArthur Canlas on the deposit slip for the new joint checking account of thespouses so that the initial deposit of P2,250 for the joint checking accountwas miscredited to Arthur's personal account. The spouses subsequentlydeposited other amounts in their joint account.

When Vivienne Canlas issued a check for Pl,639.89 in April 1977 andanother check for P1,160.00 on June 1, 1977, one of the checks wasdishonored by the bank for insufficient funds and a penalty of P20 wasdeducted from the account in both instances. Thereafter, the spouses filed acase for damages agaisnt the bank for serious anxiety, embarrassment andhumiliation by reason of the dishonor of the checks. The RTC and the IACfound that the bank had been seriously negligent and awarded damages tothe spouses Canlas.

ISSUEWhether the mistake of the teller can be considered as serious negligenceentitling the spouses Canlas to an award of damages.

RULINGYES. There is no merit in CBTC's argument that it was only required toexercise the diligence of a good father of family. The fiduciary nature of therelationship between a bank and its depositors and the extent of diligenceexpected of it in handling the accounts entrusted to its care is a greatresponsibility.

"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 ifthe account is to reflect at any given time the amount of money thedepositor can dispose of as he sees fit, confident that the bank will deliver itas and to whomever he directs. A blunder on the part of the bank, such asthe dishonor of a check without good reason, can cause the depositor not alittle embarrassment if not also financial loss and perhaps even civil andcriminal litigation."

The bank is not expected to be infallible but it must bear the blame for notdiscovering the mistake of its teller despite the established procedurerequiring the papers and bank books to pass through a battery of bankpersonnel whose duty it is to check and countercheck them for possibleerrors. Apparently, the officials and employees tasked to do that did notperform their duties with due care, as may be gathered from the testimonyof the bank's lone witness, Antonio Enciso, who casually declared that "theapproving officer does not have to see the account numbers and all thosethings. Those are very petty things for the approving manager to look into."Unfortunately, it was a "petty thing," like the incorrect account number thatthe bank teller wrote on the initial deposit slip for the newly-opened jointcurrent account of the Canlas spouses, that sparked this half-a-million-pesodamage suit against the bank.

While the bank's negligence may not have been attended with malice andbad faith, nevertheless, it caused serious anxiety, embarrassment andhumiliation to the private respondents for which they are entitled to recoverreasonable moral damages.

ii. When Utmost Diligence Required1. In dealing with Accounts of Depositors

PHILIPPINE BANKING CORPORATION v CA, 419 SCRA 487 (2004)

DOCTRINE: Sec. 2 of RA 8791 (GBL) expressly imposes a fiduciary duty onthe banks when it declares that the State recognizes the fiduciary nature ofbanking that requires high standards of integrity and performance.

The fiduciary relationship means that the banks obligation to observe highstandards of integrity and performance is deemed written into every depositagreement between a bank and its depositor.

FACTSFlorencio Pagsaligan, a close friend and officer of the bank, persuadedLeonilo Marcos to deposit money with Philippine Banking Corporation(BANK). Marcos yielded and made a time deposit with the Bank on twooccasions.


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Later, Marcos wanted to withdraw from the Bank to buy material for hisconstruction business. However, the bank convinced him to keep his timedeposit and instead, open several domestic letters of credit. Trusting thebank and Pagsaligan, he again yielded. Marcos executed 3 Trust ReceiptAgreements totaling 851k. He deposited 30% of the amount of TrustAgreement as marginal deposit. He believed that the remaining 70% wouldbe credited from his time deposit and accumulated interest.

However, the bank did not offset his time deposit due to an allegedpromissory note amount to 500k. The Bank demanded for the balance of theTrust Agreement from him. Due to failure to pay, several penalties andinterest accumulated against Marcos. Marcos now files a complaint againstthe Bank.

In their defense, the bank argues that the complaint was only an attempt toavoid liability under several trust receipt agreements that were subject of acriminal complaint.

The RTC ruled in favor of Marcos. The CA modified the decision only byreducing the damages.

ISSUE

Whether the Bank is liable for damages

RULINGYES, the bank is liable.

The bank is liable on the ground of offsetting Marcoss time deposit with afictitious promissory note. The Bank failed to present the original copy of thenote. They only presented machine copies of the duplicate. But these copieshave no evidentiary value, contradicting the Best Evidence Rule.

Sec 2 of the General Banking law of 2000 expressly imposes the fiduciary

duty of on banks. The fiduciary nature of banking requires high standards ofintegrity and performance. Although the GBL only took effect in 2000,jurisprudence has already imposed the same high standard of diligence frombanks at the time the Bank transacted with Marcos. This fiduciaryrelationship means that the banks obligation to observe high standards ofintegrity is deemed written into every deposit agreement between a bankand its depositor.

The business of banking is imbued with public interest. The stability ofbanks largely depends on the confidence of the people in the honesty andefficiency of banks. As its depositor, Marcos had the right to expect the bankwas accurately recording his transactions. He also had a right to withdrawthe amount in his time deposit upon maturity. Due to the banks failure to

produce the original copies of the promissory note and ledges, it failed totreat Marcoss account with meticulous care.

Whether it was Pagsaligan who caused such fictitious loan agreement, it willnot excuse the bank from its obligation to return the correct amount toMarcos. As stated before, a bank is liable for the wrongful acts of its officersdone in the interest of the bank or in their dealings as bank representativesbut not for acts outside the scope of their authority.

BANK OF THE PHILIPPINE ISLANDS v CASA MONTESSORIINTERNATIONALE, 430 SCRA 261 (2004)

DOCTRINE:Since the banking business is impressed with public interest, ofparamount importance thereto is the trust and confidence of the public ingeneral, the highest degree of diligence is expected and high standards ofintegrity and performance are even required of it.FACTSCASA Montessori International (CASA for brevity) opened a current accountwith defendant BPI, with CASAs President Ms. Ma. Carina C. Lebron as oneof its authorized signatories.

In 1991, after conducting an investigation, plaintiff discovered that nine (9)of its checks had been encashed by a certain Sonny D. Santos since 1990 inthe total amount of P782,000.00

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch[was] a fictitious name used by third party defendant Leonardo T. Yabutwho worked as external auditor of CASA. Third party defendant voluntarilyadmitted that he forged the signature of Ms. Lebron and encashed thechecks. "The PNP Crime Laboratory conducted an examination of the nine(9) checks and concluded that the handwritings thereon compared to thestandard signature of Ms. Lebron were not written by the latter

On March 4, 1991, respondent filed the herein Complaint for Collection withDamages against defendant bank praying that the latter be ordered toreinstate the amount of P782,500.007 in the current and savings accounts ofthe plaintiff with interest at 6% per annum.

CA apportioned the loss between BPI and CASA. The appellate court tookinto account CASAs contributory negligence that resulted in the undetectedforgery. It then ordered Leonardo T. Yabut to reimburse BPI half the totalamount claimed; and CASA, the other half. It also disallowed attorneys feesand moral and exemplary damages.

ISSUEWere any of the parties negligent and therefore precluded from setting up

forgery as a defense? Whether BPI is liable?


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RULINGBPI is solely liable. (skipped the Negotiable Instruments part- it wasestablished that there was indeed a forgery) xxx Having established theforgery of the drawers signature, BPI -- the drawee -- erred in makingpayments by virtue thereof. The forged signatures are wholly inoperative,and CASA -- the drawer whose authorized signatures do not appear on thenegotiable instruments -- cannot be held liable thereon. Neither is the latterprecluded from setting up forgery as a real defense.

We have repeatedly emphasized that, since the banking business is

impressed with public interest, of paramount importance thereto is

the trust and confidence of the public in general. Consequently, thehighest degree of diligence is expected, and high standards of

integrity and performance are even required, of it. By the nature ofits functions, a bank is "under obligation to treat the accounts of its

depositors with meticulous care, always having in mind the fiduciarynature of their relationship.

BPI contends that it has a signature verification procedure, in which checksare honored only when the signatures therein are verified to be the samewith or similar to the specimen signatures on the signature cards.Nonetheless, it still failed to detect the eight instances of forgery. Itsnegligence consisted in the omission of that degree of diligence required78 ofa bank. It cannot now feign ignorance, for very early on we have alreadyruled that a bank is "bound to know the signatures of its customers;and if it pays a forged check, it must be considered as making thepayment out of its own funds, and cannot ordinarily charge the

amount so paid to the account of the depositor whose name wasforged."79 In fact, BPI was the same bank involved when we issued thisruling seventy years ago.

2. In Selection and Supervision of EmployeesPHILIPPINE COMMERCIAL AND INTERNATIONAL BANK v CA, 350SCRA 446 (2001)

DOCTRINE: Banks are expected to exercise the highest degree of diligencein the selection and supervision of their employees. By the very nature oftheir work, the degree of responsibility, care and trustworthiness expectedof their employees and officials is far greater than those of ordinary clerksand employees.

FACTSFord Philippines instituted actions against Citibank (drawee bank) and PCIBank (collecting bank)

- Action #1: Ford drew and issued a Citibank check for P4.7m in

1977 in favor of the CIR for manufacturers sales tax deposited

with IBAA (later merged with PCI) and cleared by CB proceedsnever reached CIR Ford forced to make 2nd payment to CIR whichwas received check was a crossed check for payees account only Ford wrote separate demand letters to the banks - both banksrefused to pay NBI discovered that Godofredo Rivera, GeneralLedger Accountant of Ford recalled the check, supposedly becausethere was a computation error Rivera instructed PCI Bank toreplace the check with 2 managers checks syndicate members

deposited MCs with Pacific Banking Corp. Rivera could not befound, fugitive from justice - TC: Both banks liable, IBAA (PCI) should reimburse Citi CA:only IBAA (PCI) liable

- Action #2: Ford drew Citibank checks in 1978 (P5.851m) and1979 (P6.311m) payable to CIR for percentage taxes both crossedchecks - never reached CIR though receipts were issued,considered by BIR as fake and spurious Ford paid BIR again Godofredo Rivera (the legend returns) as Ledger Accountantprepared the check - delivered it to Remberto Castro, pro-managerof PCIB San Andres Castro and Dulay, an assistant manager of theMeralco Branch of PCI, opened a account in the name of a fictitious

Reynaldo Reyes deposited a worthless Bank of America check inthe same amount as the Ford check replaced the worthless checkwith the Ford check for clearing Reynaldo Reyes account wascredited with amount same procedure with 2nd check Castrothen distributed checks drawn from Reynaldo Reyes account toother conspirators RTC held Citibank liable, absolved PCI CA:affirmed

ISSUEWere the banks negligent?

RULING

YES. The direct perpetrators are fugitives present parties must bear theburden of loss although employees of Ford initiated the transactions, theiractions are not the proximate cause of encashing the checks BoD of forddid not confirm Riveras recall of the check PCI neglected to verifyauthority of Rivera crossed check is a warning that it should be depositedonly in CIRs account PCI liable for 4.7m check although no consciousparticipation, PCI is responsible frauds perpetrated by its officers Citibankshould have scrutinized the checks: no clearing stamps, no initials bothbanks negligent in selection and supervision of their employees for 2nd and3rd check equally liable for the loss by very nature of banking business,degree of responsibility, care and trustworthiness of bank employees is fargreater than those of ordinary clerks and employees banks are expectedto exercise the highest degree of diligence in the selection and supervision

of employees.


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3. To be Mortgagees in Good FaithCRUZ v BANCOM FINANCE CORPORATION, 379 SCRA 490 (2002)

DOCTRINE: Mortgagee-banks, unlike private individuals, are expected toexercise greater care and prudence in their dealings, including thoseinvolving registered lands. A banking institution is expected to exercise duediligence before entering into a mortgage contract. The ascertainment of the

status or condition of a property offered to it as security for a loan must bea standard and indispensable part of its operations.

FACTSEdilberto Cruz and Simplicio Cruz offered to sell their parcel of land toNorma Sulit. In order to facilitate the sale, the Cruzs executed a deed ofsale in favor of Candelaria Sanchez, but no consideration was paid. On thesame day Candelaria Sanchez conveyed the land to Norma Sulit. Unknownto the plaintiffs, Norma managed to obtain a loan from Bancom secured bya mortgage over the land now titled in her name.

Norma defaulted on her obligations to the plaintiffs and later on alsodefaulted on her payments with Bancom. The land was foreclosed andauctioned, Bancom was the highest bidder.

Cruz then filed for reconveyance of the land. While Bancom claimed priorityright over Cruz, alleging it was a mortgagee in good faith.

ISSUEWhether Bancom is a mortgagee in good faith

HELD

NO. As a general rule, every person dealing with registered land may safelyrely on the correctness of the certificate of title and is no longer required tolook behind the certificate in order to determine the actual owner.

Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greatercare and prudence in its dealings, including those involving registered lands.A banking institution is expected to exercise due diligence before enteringinto a mortgage contract. The ascertainment of the status or condition of aproperty offered to it as security for a loan must be a standard andindispensable part of its operations.

In Rural Bank of Compostela v. CA, we held that a bank that failed toobserve due diligence was not a mortgagee in good faith. In the words ofthe ponencia:

x x x [T]he rule that persons dealing with registered lands can rely

solely on the certificate of title does not apply to banks.

Banks, indeed, should exercise more care and prudence in dealingeven with registered lands, than private individuals, for theirbusiness is one affected with public interest, keeping in trust moneybelonging to their depositors, which they should guard against lossby not committing any act of negligence which amounts to lack ofgood faith by which they would be denied the protective mantle ofthe land registration statute, Act [No.] 496, extended only to

purchasers for value and in good faith, as well as to mortgagees ofthe same character and description. (Citations omitted)

Recently, in Adriano v. Pangilinan, we said that the due diligence required ofbanks extended even to persons regularly engaged in the business oflending money secured by real estate mortgages.

The evidence before us indicates that respondent bank was not a mortgageein good faith. First, at the time the property was mortgaged to it, it failed toconduct an ocular inspection. Judicial notice is taken of the standard practicefor banks before they approve a loan: to send representatives to thepremises of the land offered as collateral and to investigate the ownershipthereof. As correctly observed by the RTC, respondent, before constitutingthe mortgage over the subject property, should have taken intoconsideration the following questions:

1) Was the price of P150,000.00 for a 33.9 hectare agriculturalparcel of land not too cheap even in 1978?

2) Why did Candelaria Sanchez sell the property at the same priceof P150,000.00 to Norma Sulit on the same date, June 21, 1978when she supposedly acquired it from the plaintiffs?

3) Being agricultural land, didnt it occur to the intervenors thatthere would be tenants to be compensated or who might pose asobstacles to the mortgagees exercise of acts of dominion?

4) In an area as big as that property, [why] did they not verify ifthere were squatters?

5) What benefits or prospects thereof could the ultimate ownerexpect out of the property?

Verily, the foregoing circumstances should have been looked into,for if either or both companies did, they could have discovered thatpossession of the land was neither with Candelaria nor withNorma.[43]

Respondent was clearly wanting in the observance of the necessary

precautions to ascertain the flaws in the title of Sulit and to examine the


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condition of the property she sought to mortgage.[44] It should not havesimply relied on the face of the Certificate of Title to the property, as itsancillary function of investing funds required a greater degree ofdiligence.[45] Considering the substantial loan involved at the time, itshould have exercised more caution.

OMENGAN v PHILIPPINE NATIONAL BANK, 512 SCRA 305 (2007)

DOCTRINE: A mortgagee can rely on what appears on the certificate of titlepresented by the mortgagor and an innocent mortgagee is not expected toconduct an exhaustive investigation on the history of the mortgagors title.This rule is strictly applied to banking institutions.

Banks should exercise more care and prudence in dealing even withregistered lands, than private individuals, as their business is one affectedwith public interest. Thus, the rule that persons dealing with registeredlands can rely solely on the certificate of title does NOT apply to banks.

FACTSThe PNB approved the Omengan's application for a revolving credit line ofP3 million. The loan was secured by two residential lots in the name ofEdgar Omengan. The first P2.5 million was released on three separatedates. The release of the final half million was, however, withheld byMontalvo because of a letter allegedly sent by Edgars sisters, praying thatthe last half million not be realeased since:

"the property mortgaged, while in the name of Edgar Omengan, isowned in co-ownership by all the children of the late Roberto andElnora Omengan. The lawyer who drafted the document registeringthe subject property under Edgars name can attest to this fact. Wehad a prior understanding with Edgar in allowing him to make use ofthe property as collateral, but he refuses to comply with such

arrangement. Hence, this letter."

Nevertheless, the half million was released.

Subsequently, the Omengans applied for an increase in credit line from 3 to5 mil. This was approved subject to the condition that Edgars sisters gavetheir conformity. But petitioners failed to secure the consent of Edgarssisters; hence, PNB put on hold the release of the additional P2 million. Still,Edgar Omengan demanded the release of the P2 million. He claimed thatthe condition for its release was not part of his credit line agreement withPNB because it was added without his consent. PNB denied his request.

Thus the present complaint for breach of contract and damages.

ISSUE

Whether there was Breach of contract in this case

RULING

NO. In this case, the parties agreed on a P3 million credit line. This sumwas completely released to petitioners who subsequently applied10 for anincrease in their credit line. This was conditionally approved by PNBs creditcommittee. For all intents and purposes, petitioners sought an additional

loan.

The condition attached to the increase in credit line requiring petitioners toacquire the conformity of Edgars sisters was never acknowledged andaccepted by petitioners. Thus, as to the additional loan, no meeting of theminds actually occurred and no breach of contract could be attributed toPNB. There was no perfected contract over the increase in credit line.

The business of a bank is one affected with public interest, for which reasonthe bank should guard against loss due to negligence or bad faith. Inapproving the loan of an applicant, the bank concerns itself with properinformation regarding its debtors. Any investigation previously conducted onthe property offered by petitioners as collateral did not preclude PNB fromconsidering new information on the same property as security for asubsequent loan. The credit and property investigation for the original loanof P3 million did not oblige PNB to grant and release any additional loan. Atthe time the original P3 million credit line was approved, the title to theproperty appeared to pertain exclusively to petitioners. By the time theapplication for an increase was considered, however, PNB already hadreason to suspect petitioners claim of exclusive ownership.

Banks, indeed, should exercise more care and prudence in dealing even withregistered lands, than private individuals, as their business is one affectedwith public interest. Thus, this Court clarified that the rule that personsdealing with registered lands can rely solely on the certificate of title does

not apply to banks.

4. In the custody of documents; Integrity of Records, Securityof Premises

HEIRS OF EDUARDO MANLAPAT v CA, 459 SCRA412 (2005)

DOCTRINE:A mortgagee-bank has no right to deliver to any stranger anyproperty entrusted to it other than those contractually and legally entitled toits possession. The act of a bank of allowing complete strangers to takepossession of the owners duplicate certificate even if the purpose is merelyfor photocopying constitutes manifest negligence which would hold it liablefor damages under Article 1170 and other relevant provisions of the Civil

Code.


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FACTS

Lot 2204 was originally in possession of Jose Alvarez (Eduardosgrandfather). Eduardo Manalapat, Alvarezs successor-in-interest, sold aportion of it to Ricardo Cruz executing a Kasulatan and SinumpaangSalaysay to document it. In 1976, the lot became registered only under thename of Eduardo Manalapat pursuant to a free patent. The sale ofManalapat and Cruz was forgotten, as Cruz did not even know an OCT wasalready issued to Manalapat.

Leon Banaag, as atty-in-fact of Eduardo, executed a mortgage with RuralBank of San Pascual for 100k with Lot 2204 as collateral. Banaag depositedthe owners duplicate OCT with the bank.

However, when the Cruzs heirs learned of such sale, they wanted to securethe OCT for presentation to the Register of Deeds and for issuance of aseparate OCT. They urged to obtain the OCT from Manalapats heirs butwere denied. Then, they went to the Rural Bank to photocopy the ownersduplicate OCT deposited with the bank. The Rural banks Manager, JoseSalazar, allowed them to borrow the OCT for photocopying. Ultimately, theheirs secured a TCT for a portion of the Lot.

When Banaag went to the Rural bank to tender payment of the mortgage,he learned of the actions of the Cruzs heirs that led to the subdivision of thelot and the issuance of two separate titles.

3 cases were filed with the trial court, all involving the issuance of the TCT.RTC ruled in favor of Manalapat. CA reversed and ruled in favor of Cruz andRural Bank.

ISSUE1. Whether the cancellation of the OCT and the splitting into two

separate titles may be accorded legal recognition.2. Whether the bank is liable for letting the mortgaged document be

borrowed by 3

rd

persons.

RULING

YES, the two separate titles are valid.

The heirs of Cruz have sufficiently proven their claim of ownership over aportion of Lot 2204. The fact that the Oct was not registered with theirname is immaterial. Registration is not a requirement for validity of contractbetween parties. The principal purpose of registration is merely to notifyother persons that a transaction involving the property has been enteredinto. The issuance of the OCT in favor of Manalapat does not disregard thefact that the Cruz owned a portion of the land. The principle ofindefeasibility of a Torrens title does not apply where fraud attended the

issuance of the title.

The issuance of the two TCT was valid. The Cruzs heirs presented to the RDthe original owners duplicate of the OCT. aside from that, they presentedthe Kasulatan and Sinumpaang Salaysay where Manalapat acknowledge thesale in favor of Cruz. The manner of obtaining the OCT did not invalidate theTCT.

The bank is liable for damages. A mortgagee-bank has no right to deliver to

any stranger any property entrusted to it other than to those contractuallyand legally entitled to its possession. Though they rightfully acknowledgedthe ownership of Cruzs heirs, the bank lent the original OCT w/o priorinvestigation and did not even notified Manalapats heirs of the transaction.The bank should not have lent the certificate even only for the purpose ofphotocopying it. Such act constitutes manifest negligence on the part of thebank, which would necessarily hold it liable for damages under Art 1170 andother relevant provisions of the Civil Code. Thus, the bank is liable for 50kas nominal damages to Manalapats heirs.

iii. Applicability to Commercial Transactions Outside of CoreBanking Functions

REYES v CA, 363 SCRA 51 (2001)

DOCTRINE: The same higher degree of diligence is NOT expected to beexerted by banks in commercial transactions that do not involve theirfiduciary relationship with their depositors.

FACTSIn view of the 20th Asian Racing Conference then scheduled to be held inSeptember, 1988 in Sydney, Australia, the Philippine Racing Club, Inc.(PRCI, for brevity) sent four (4) delegates to the said conference. PetitionerGregorio H. Reyes, as vice-president for finance, racing manager, treasurer,

and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to therespondent bank to apply for a foreign exchange demand draft in Australiandollars.

Godofredo went to respondent bank's Buendia Branch in Makati City toapply for a demand draft in the amount One Thousand Six Hundred TenAustralian Dollars (AU$1,610.00) payable to the order of the 20 th AsianRacing Conference Secretariat of Sydney, Australia.

Godofredo asked if there could be a way for respondent bank toaccommodate PRCI's urgent need to remit Australian dollars to Sydney.Yasis of respondent bank then informed Godofredo of a roundabout way ofeffecting the requested remittance to Sydney thus: the respondent bank

would draw a demand draft against Westpac Bank in Sydney, Australia


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(Westpac-Sydney for brevity) and have the latter reimburse itself from theU.S. dollar account of the respondent in Westpac Bank in New York, U.S.A.(Westpac-New York for brevity). This arrangement has been customarilyresorted to since the 1960's and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo,agreed to this arrangement or approach in order to effect the urgenttransfer of Australian dollars payable to the Secretariat of the 20th AsianRacing Conference.

Petitioners later went to Austraila to attend the said racing conference.Geofredo, together with other delegates, went to the Hotel Regent Sydneyto register only to find out that their demand draft was dishonored. Shortlyafter, his wife followed and met the same fate. They were greatlyinconvenienced and embarassed of the incident. Although things eventuallywent well, damage was already done.

As soon as the demand draft was dishonored, the respondent bank, thinkingthat the problem was with the reimbursement and without any idea that itwas due to miscommunication, re-confirmed the authority of Westpac-NewYork to debit its dollar account for the purpose of reimbursing Westpac-Sydney.Respondent bank also sent two (2) more cable messages toWestpac-New York inquiring why the demand draft was not honored.

It was later found out that the source of the problem was Westpac-Sydneysdecoding error. (7 was encoded as 1 in the SWIFT message)

They sued the respondent bank for damages for the said incident.

ISSUEWhether the respondent bank is liable for damages

RULINGNO. There is no basis to hold the respondent bank liable for damages for

the reason that it exerted every effort for the subject foreign exchangedemand draft to be honored. It was in fact due to erroneous decoding onthe part of Westpac-Sydney of the Bank's SWIFT message which led to theproblem.

Also, The peitioners were briefed by a representative of the respondent bankregarding the porcedure thus they are estopped from the denying the saidprocedure.

The petitioners contend that due to the fiduciary nature of the relationshipbetween the respondent bank and its clients, the respondent should haveexercised a higher degree of diligence than that expected of an ordinaryprudent person in the handling of its affairs as in the case at bar.

In Philippine Bank of Commerce v. Court of Appeals15 upholding along standing doctrine, we ruled that the degree of diligencerequired of banks, is more than that of agood father of afamily where the fiduciary nature of their relationship with theirdepositors is concerned. In other words banks are duty bound totreat the deposit accounts of their depositors with the highestdegree of care. But the said ruling applies only to cases where banksact under their fiduciary capacity, that is, as depositary of the

deposits of their depositors. But the same higher degree of diligenceis not expected to be exerted by banks in commercial transactions

that do not involve their fiduciary relationship with their depositors.

iv. Applicability to Government Financial InstitutionsGSIS v SANTIAGO, 414 SCRA 563 (2003)Due diligence required of banks extend even to persons, or institutionsregularly engaged in the business of lending money secured by real estatemortgages, such as government financial institutions. These are likewiseexpected to exercise greater care and prudence in its dealings, includingthose involving registered land.

v. Applicability to those Engaged in Lending Money Securedby Real Estate Mortgages

ADRIANO v PANGILINAN, 373 SCRA 544 (2002)While it is true that a person dealing with registered lands need not gobeyond the certificate of title, it is likewise a well-settled rule that apurchaser or mortgagee cannot close his eyes to facts which should put areasonable man on his guard, and then claim that he acted in good faithunder the belief that there was no defect in the title of the vendor ormortgagor.

vi. Liability for Negligence1.

Applicable Rules on Determination of Negligence

PHILIPPINE BANK OF COMMERCE v CA, 269 SCRA 695 (1997)

DOCTRINE: Negligence is the omission to do something which a reasonableman, guided by those considerations which ordinarily regulate the conductof human affairs, would do, or the doing of something which a prudent andreasonable man would do. The seventy-eight (78)-year-old, yet stillrelevant, case of Picart v. Smith, provides the test by which to determinethe existence of negligence in a particular case which may be stated asfollows: Did the defendant in doing the alleged negligent act use thatreasonable care and caution which an ordinarily prudent personwould have used in the same situation? If not, then he is guilty of

negligence. The law here in effect adopts the standard supposed to be


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supplied by the imaginary conduct of the discreet paterfamilias of theRoman law. The existence of negligence in a given case is not determinedby reference to the personal judgment of the actor in the situation beforehim. The law considers what would be reckless, blameworthy, or negligentin the man of ordinary intelligence and prudence and determines liability bythat.

FACTS

RMC had account in P; RMC gave funds to secretary to deposit in P insteadof doing so, secretary deposited funds in name of her husbandmodusoperandi: wrote the name of husband and his account number on originaldeposit slip, then, on duplicate slip, left name blank but filled in husbandsaccount numberwhen teller asked why, she said it was because the 2nd slipwould only be for personal records when teller approved slip, shed fill inRMC under the name then change the account numberR filed action forrecovery against P.

ISSUE

RULING1. Negligence = omission to do something that a reasonable man would dohere, teller negligent in stamping slips w/o asking for name to be put on theduplicatebank also negligent in not exercising proper supervision over theteller (since they didnt know until they conducted an investigation that theteller was doing that)2. The negligence of the bank was the proximate cause since even if thesecretary filled out the slip wrong, she would never have gotten away with ithad the slips not been approved by the teller3. Bank also liable under last clear chance4. But, since RMC contributorily negligent, damages reduced

CONSOLIDATED BANK AND TRUST CORPORATION v CA, 410 SCRA562 (2003)

DOCTRINE: In culpa contractual (negligence), once the plaintiff proves abreach of contract, there is a presumption that the defendant was at fault ornegligent. The Doctrine of Last Clear Chance is inapplicable in culpacontractual because neither the contributory negligence of one party (bank)nor its last chance to avoid the loss would exonerate the other party(depositor) from liability. Such contributory negligence or last chancemerely serves to reduce the recovery of damages by the plaintiff but doesNOT exculpate the depositor from his breach of contract.

FACTSLC Diaz, an accounting firm, through its cashier Macaraya, filled up adeposit slip and a savings deposit slip. Macaraya instructed the messenger,

Calapre to deposit the money with Solidbank. Macaraya also gave Calapre

the Solidbank passbook.

At the bank, Calapre gave the passbook to the teller and went out to doanother errand. When Calapre returned and asked for the passbook, theteller told (redundant teller-told) him that somebody got the passbook.Calapre reported the incident to Macaraya.

Later on, it was discovered that an unauthorized withdrawal of P300,000.00

was made using the lost passbook. LC Diaz demanded from Solidbank thereturn of the money. Solidbank solidly refused prompting LC Diaz to file arecovery suit. RTC absolved Solidbank based on the rules on savingsaccount which gives presumption that the holder of the passbook is theowner. CA held Solidbank liable based on negligence and culpa aquiliana.

ISSUE

Whether Solidbank is liable for the loss

HELDYES. The contract between the bank and its depositor is governed by theprovisions of the Civil Code on simple loan.[17] Article 1980 of the CivilCode expressly provides that x x x savings x x x deposits of money in

banks and similar institutions shall be governed by the provisionsconcerning simple loan. There is a debtor-creditor relationship betweenthe bank and its depositor. The bank is the debtor and the depositor is thecreditor. The depositor lends the bank money and the bank agrees to paythe depositor on demand. The savings deposit agreement between thebank and the depositor is the contract that determines the rights andobligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature ofbanking. Section 2 of Republic Act No. 8791 (RA 8791),[18] which tookeffect on 13 June 2000, declares that the State recognizes the fiduciarynature of banking that requires high standards of integrity and

performance.[19] This new provision in the general banking law,introduced in 2000, is a statutory affirmation of Supreme Court decisions,starting with the 1990 case of Simex International v. Court of Appeals,[20]holding that the bank is under obligation to treat the accounts of itsdepositors with meticulous care, always having in mind the fiduciary natureof their relationship.[21]

This fiduciary relationship means that the banks obligation to observe highstandards of integrity and performance is deemed written into everydeposit agreement between a bank and its depositor. The fiduciary nature ofbanking requires banks to assume a degree of diligence higher than that ofa good father of a family. Article 1172 of the Civil Code states that thedegree of diligence required of an obligor is that prescribed by law or

contract, and absent such stipulation then the diligence of a good father of a


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family.[22] Section 2 of RA 8791 prescribes the statutory diligence requiredfrom banks that banks must observe high standards of integrity andperformance in servicing their depositors. Although RA 8791 took effectalmost nine years after the unauthorized withdrawal of the P300,000 fromL.C. Diazs savings account, jurisprudence[23] at the time of the withdrawalalready imposed on banks the same high standard of diligence requiredunder RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does notconvert the contract between the bank and its depositors from a simple loanto a trust agreement, whether express or implied. Failure by the bank topay the depositor is failure to pay a simple loan, and not a breach oftrust.[24] The law simply imposes on the bank a higher standard of integrityand performance in complying with its obligations under the contract ofsimple loan, beyond those required of non-bank debtors under a similarcontract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trustagreement because banks do not accept deposits to enrich depositors but toearn money for themselves. The law allows banks to offer the lowestpossible interest rate to depositors while charging the highest possible

interest rate on their own borrowers. The interest spread or differentialbelongs to the bank and not to the depositors who are not cestui que trustof banks. If depositors are cestui que trust of banks, then the interestspread or income belongs to the depositors, a situation that Congresscertainly did not intend in enacting Section 2 of RA 8791.

2. Award of Actual, Moral, Compensatory or TemperateDamages

ARANETA v BANK OF AMERICA, 40 SCRA 144 (1970)

DOCTRINE: The financial credit of a businessman is a prized and valuable

asset, it being a significant part of the foundation of his business. Anyadverse reflection thereon constitutes some material loss to him. In the US,temperate damages are allowed. There were cases where from the nature ofthe case, definite proof of pecuniary loss cannot be offered, although thecourt is convinced that there has been such loss.

FACTSLeopoldo Araneta, a local merchant, issued a check for $500 payable to cashand drawn against Bank of America (San Francisco branch). At that time, hehad a credit balance of $523.81 in his account. Unfortunately, when it wasreceived by the bank a day after, it was dishonored due to a closed account.

Upon inquiry, the Bank of America acknowledged that it was due to an errorand that for some reason, the check had been encoded with the wrongaccount number.

Months after, Araneta issued 2 checks for $500 and $150 payable to cashand drawn against Bank of America. When these checks were presented forpayment, they were again dishonored due to a closed account.

The check of $500 was actually paid by the Bank of America to First NationalCity Bank. However, Bank of America claimed that such had beeninadvertently made and returned the check to First National City Bank, withthe request that the amount be credited to Bank of America. In turn, FirstNational City Bank informed the depositor (Saldana) about the checksreturn. However, before Saldana even replied, Bank of America recalled thecheck and honored it.

Because of these incidents, Araneta, through counsel, sent a letter to theBank of America demanding damages in the sum of $20,000. Although itadmitted its responsibility for the inconvenience, the bank claimed that thedamages sought were excessive and instead offered to ay $2,000.

Thus, in 1962, Araneta filed a complaint against the Bank of America for therecovery of (1) actual damages, (2) moral damages, (3) temperatedamages, (4) exemplary damages, and (5) attorneys fees for an aggregatetotal of $120,000.

The trial court awarded all the damages prayed for, but the Court of Appealseliminated the award of compensatory and temperate damages, andreduced the amount of moral damages, exemplary damages, and attorneysfees.

ISSUEWhether temperate and moral damages should be awarded to Araneta

RULINGTEMPERATE DAMAGES: YES. The financial credit of a businessman is aprized and valuable asset, it being a significant part of the foundation of hisbusiness. Any adverse reflection thereon constitutes some material loss tohim. The incidents obviously affected the credit of Araneta with Saldana andwith any other person who would come to know about the refusal of thedefendant to honor said checks.

It cannot hardly be possible that a customers check can be wrongfullyrefused payment without some impeachment of his credit, which must infact be an actual injury x x x.


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In the US, temperate damages are allowed. There were cases where fromthe nature of the case, definite proof of pecuniary loss cannot be offered,although the court is convinced that there has been such loss. For instance,injury to ones commercial credit or to the goodwill of the business firm isoften hard to show with certainty in terms of money.

MORAL DAMAGES: YES. Under Art. 2217 of the Civil Code, besmirchedreputation is a ground upon which moral damages can be claimed, but the

Court of Appeals did take this element into consideration. Quoting from itsdecision, x x x the damages to his reputation as an established and well-known international trader entitled him to recover moral damages x x x hiswounded feelings and the mental anguish suffered by him cause his bloodpressure to rise beyond normal limits, x x x

PRUDENTIAL BANK v CA, 328 SCRA 264 (2000)

DOCTRINE: The banks negligence was the result of a lack of due care andcaution required of managers and employees of a firm engaged in sosensitive and demanding business as banking. While the banks negligencemay not have been attended with malice and bad faith, nevertheless, itcaused serious anxiety, embarrassment, and humiliation. Hence, the

offended party is entitled to recover reasonable moral damages.

The law allows the grant of exemplary damages by way of example for thepublic good. The public relies on the banks sworn profession of diligenceand meticulousness in giving irreproachable service. This meticulousnessmust be maintained at all times by the banking sector.

FACTSLeticia Tupasi-Valenzula opened a Savings Account and Current Accountwith Prudential Bank. Initially, she deposited a check amounting to 35k onJune 1, 1988.

As payment for purchasing jewelry, Leticia issued a check amounting to11.5k in favor of Belen Legaspi. Belen then endorsed the check to PhilipLhuillier. When Philip deposited the check in his account, the check wasdishonored due to insufficient funds. Leticia was surprised to learn of thedishonor of the check. She inquired with Prudential Bank, showing herpassbook indicating she had sufficient funds. However, Albert Angeles Reyes(OIC of her account) ignored the passbook, stating that the bank ledger wasthe best proof that she did not have enough funds.

However, it was found out that the 35k check initially deposited by Leticiawas credited only on June 24, 1988, or after 23 days. The 11k check wasredeposited and properly cleared only on June 27, 1988. Leticia filed acomplaint against Prudential Bank due to the incident for causing

embarrassment and humiliation.

RTC dismissed the complaint. However, CA reversed the decision, makingPrudential Bank liable for damages.

ISSUEWhether Prudential bank is liable for damages

RULING

YES, the bank is liable.

It is the banks fault for misposting the initial check to another account anddelayed the posting of the same to the Leticias account. Although themistake was not attended with malice and bad faith, there is still clear proofof lack of supervision or due care and caution expected of a bank.

The relationship between a bank and depositor is fiduciary in nature. Theextent of diligence expected from the bank is with utmost fidelity. As abusiness affected with public interest and due to its nature, a bank is underobligation to treat the account of its depositors with meticulous care. It doesnot matter whether the account consists of only a few hundred pesos or ofmillions of pesos.

In this case, even if there was no malice, the fact still remain that Leticiaexperienced serious anxiety, embarrassment and humiliation. Thus, she isentitled to recover damages; 100k for moral, 20k for exemplary 30k forattys fees.

CITYTRUST BANKING CORPORATION v VILLANUEVA, 361 SCRA 446(2001)

DOCTRINE: Moral damages include physical suffering, mental anguish,fright, serious anxiety, besmirched reputation, wounded feelings, moral

shock, social humiliation, and similar injury. Although incapable of pecuniarycomputation, moral damages may be recovered if they are the proximateresult of the defendants wrongful act or omission.

Requisites for the award of moral damages:1. There must be an injury, whether physical, mental, or psychological,

clearly sustained by the claimant2. There must be a culpable act or omission factually established3. The wrongful act or omission of the defendant is the proximate

cause of the injury sustained by the claimant4. The award of damages is predicated on any of the cases stated in

Art. 2219 of the Civil Code

Art. 2219: Moral damages may be recovered in the following and


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analogous cases:

1. A criminal offense resulting in physical injuries;2. Quasi-delicts causing physical injuries;3. Seduction, abduction, rape, or other lascivious acts;4. Adultery or concubinage;5. Illegal or arbitrary detention or arrest;6. Illegal search;

7. Libel, slander or any other form of defamation;8. Malicious prosecution;9. Acts mentioned in Article 309;10.Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,

34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred toin No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bringthe action mentioned in No. 9 of this article, in the order named.

FACTS

Sometime in February, 1984, the respondent opened a savings and acurrent account with the petitioner bank. On May 21, 1986, respondent ranout of checks so he requested a new checkbook from one of the respondentbanks customer service representative. He then filled up a checkbookrequisition slip with the obligatory particulars, except for his current accountnumber which he could not remember. Respondent expressed hispredicament and the representative assured that the bank shall look intothe banks account records. Villanueva was thus later on issued a newcheckbook.

On June 17, 1986, Respondent Villanueva issued a P50,000 check payableto the order of Kingly Commodities Traders and Multi Resources, I

1Bank-Notes 44696336 (adopted)

Documents

Transcript of 1Bank-Notes 44696336 (adopted)