BANKING | Nature of Funds Deposited | 1

[G.R. No. 43682. March 31, 1938.] of credits in cases of insolvency and liquidation of a bank. But the
Philippine Legislature subsequently enacted Act No. 3519, amending
In re Liquidation of Mercantile Bank of China. TAN TIONG TICK, various sections of the Revised Administrative Code, which took effect on
claimants-appellant, February 20, 1929, and section 1641 of this latter Code, as amended by
v. said Act, provides that "In the case of the liquidation of a bank or banking
AMERICAN APOTHECARIES CO., ET AL., Claimants-Appellees. institution, after payment of the costs of the proceedings, including
reasonable expenses, commissions and fees of the Bank Commissioner,
SYLLABUS
to be allowed by the court, the Bank Commissioner shall pay the debts of
the institution, under decree of the court in the order of their legal
1. BANKS; CHARACTER OF CURRENT ACCOUNT AND SAVINGS
priority."
DEPOSITS, APPLICABLE LAW. — Current account and savings deposits
are not preferred credits in the cases, like the present, involving the
4. ID.; ID.; LEGISLATIVE INTENTION. — From this section 1641 it is
insolvency and liquidation of a bank, where there are various creditors
inferred that the intention of the Philippine Legislature, in providing that
and it becomes necessary to ascertain the preference of various credits.
the Bank Commissioner shall pay the debts of the company by virtue of
These deposits are essentially mercantile contracts and should, therefore,
an order of the court in the order of their legal priority, was to enforce
be governed by the provisions of the Code of Commerce, pursuant to its
the provisions of sections 48, 49 and 50 of the Insolvency Law in the
article 2.
sense that they are made applicable to cases of insolvency or bankruptcy
and liquidation of banks. No other deduction can be made from the phrase
2. ID.; ID.; COMMERCIAL LOANS. — In accordance with article 309 of the
"in the order of their legal priority" employed by the law, for there being
Code of Commerce, the so-called current account and savings deposits
no law establishing any priority in the order of payment of credits, the
have lost the character of deposits properly so called, and are converted
legislature could not reasonably refer to any legislation upon the subject,
into simple commercial loans, because the bank disposed of the funds
unless the interpretation above stated is accepted.
deposited by the claimant for its ordinary transactions and for the banking
business in which it was engaged. That the bank had the authority of the
5. ID.; ID.; SET OFF OF CREDITS. — The Bank Commissioner set off the
claimant to make use of the money deposited on current and savings
claims of the appellant against what the bank had against him. The court
accounts is deducible from the fact that the bank has been paying interest
approved this set off over the objection of the appellant. The appellees
on both deposits, and the claimant himself asks that he be allowed
contend that the set off does not lie in this case because otherwise it
interest up to the time when the bank ceased its operations. Moreover,
would prejudice them and the other creditors in the liquidation. Held: That
according to sections 125 of the Corporation Law and 9 of Act No. 3154,
the court’s ruling is not error. "It may be stated as a general rule that
said bank is authorized to make use of the current account, savings, and
when a depositor is indebted to a bank, and the debts are mutual — that
fixed deposits provided it retains in its treasury a certain percentage of
is, between the same parties and in the same right — the bank may apply
the amounts of said deposits.
the deposit, or such portion thereof as may be necessary, to the payment
of the debt due it by the depositor, provided there is no express
3. ID.; PREFERENCE OF CREDITS IN CASES OF INSOLVENCY AND
agreement to the contrary and the deposit is not specifically applicable to
LIQUIDATION OF A BANK. — Even after the enactment of the Insolvency
some other particular purpose." (7 Am. Jur., par. 629, p. 455.) The
Law there was no law in this jurisdiction governing the order or preference
situation referred to by the appellees is inevitable because section 1639

of the Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the assets of the bank
into cash and this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this individual
liquidation the debtors are entitled to set off, by way of compensation,
their claims against the bank.
6. ID.; ID.; INTEREST. — Under articles 1101 and 1108 of the Civil Code,
interest is allowed by way of indemnity for damages suffered, in the cases
wherein the obligation consists in the payment of money. In view thereof,
Held: That in the absence of any express law or of any applicable provision
of the Code of Commerce, it is not proper to pay this last kind of interest
to the appellant upon his deposits in the bank, for this would be
anomalous and unjustified in a liquidation or insolvency of a bank. This
rule should be strictly observed in the instant case because it is
understood that the assets should be prorated among all the creditors as
they are insufficient to pay all the obligations of the bank.
IMPERIAL, J.:
In the proceedings for the liquidation of the Mercantile Bank of China, the
appellant presented a written claim alleging: that when this bank ceased
to operate on September 19, 1931, his current account in said bank
showed a balance of P9,657.50 in his favor; that on the same date his
savings account in the said bank also showed a balance in his favor of
P20,000 plus interest then due amounting to P194.78; that, on the other
hand, he owed the bank in the amount of P13,262.58, the amount of the
trust receipts which he signed because of his withdrawal from the bank
of certain merchandise consigned to him without paying the drafts drawn
upon him by the remittors thereof; that the credits thus described should
be set off against each other according to law, and on such set off being
made it appeared that he was still the creditor of the bank in the sum of
P16,589.70. And he asked that the court order the Bank Commissioner
to pay him the aforesaid balance and that the same be declared as a
preferred credit. The claim was referred to the commissioner appointed
by the court, who at the same time acted as referee, and this officer
BANKING | Nature of Funds Deposited | 2
recommended that the balance claimed be paid without interest and as
an ordinary credit. The court approved the recommendation and entered
judgment in accordance therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented under the
following six groups:" (First) Current accounts, savings and fixed
deposits. (Second) Checks or drafts sold by the Mercantile Bank of China
and not paid by the correspondents or banks against which they were
drawn. (Third) Checks or drafts issued by the Mercantile Bank of China in
payment or reimbursement of drafts or goods sent to it for collection by
banks and foreign commercial houses against merchants or commercial
entities of Manila. (Fourth) Drafts for collection received by the Mercantile
Bank of China to be collected from merchants and commercial entities in
Manila, and which were pending collection on the date of the suspension
of payments. (Fifth) Claims of depositors who are at the same time
debtors of the Mercantile Bank of China. (Sixth) Various claims." And
referring to the claim of the appellant, he states:
"Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount
of P27,597.80, the total amount of the following sums which he has in his
favor in said bank including the corresponding interests:
Balance on current account P7,390.11
Balance of savings account No. 2266 20,000.00
_________
Total 27,890.11.
"Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that
is, P194.78 on the savings account and P12.91 on the current account,
the amount claimed makes a total of P27,597.80.
"Notwithstanding the fact that the Bank Commissioner found the claim in
accordance with the books of the Mercantile Bank of China, he declined
to issue the corresponding certificate of proof of claim because the said
claimant has pending in the said bank obligations for accepting drafts
amounting to a total of $6,631.29.

"At the hearing of this claim, the claimant admitted such pending
obligations, alleging at the same time that to guarantee the payment of
drafts accepted by him, he pledged his bank book No. 2266, which also
answered for the payment of any credit which the said bank may extend
to him.
"In Exhibit A presented by the claimant as evidence, consisting of a letter
dated November 4, 1931, addressed by Mr. H. J. Belden to the then Bank
Commissioner, Mr. Leo. H. Martin, it appears that the said savings
account was constituted for the sole purpose of securing the payment of
drafts against the claimant, the bill of ladings of which were delivered to
him upon trust-receipts, and that, according to the records of the bank,
Mr. Tan Tiong Tick did not obtain any other accommodation from the bank
except the trust-receipts.
"RECOMMENDATION
"Having established the existence of such deposits in the name of Tan
Tiong Tick and the latter having recognized the obligation in favor of the
bank alleged by the Bank Commissioner, for the security of which he
constituted the savings deposit in the amount of P20,000, it is
recommended that from this amount there be deducted the amount of
the obligation of P13,778.90 which the claimant acknowledges in favor of
the Mercantile Bank of China, and that the difference, plus the other
current account deposit of P7,390.11, be considered as ordinary credits
subject to the equal division of the funds of the said bank.
"As to the interest on said deposits also claimed by Mr. Tan Tiong Tick,
the rejection thereof is recommended in view of the fact that the Bank
Commissioner has not credited any interest to the current and savings
accounts of the Mercantile Bank of China, and it would be unfair that
interest, not credited to the others, be allowed to this claimant."
It will be noted that in the report of the commissioner the credit of the
claimant for the balance of his deposit on current account has been
reduced to P7,390.11, instead of P9,657.50 alleged in his claim, the total
BANKING | Nature of Funds Deposited | 3
balance recommended in favor of the appellant being P13,611.21, without
including interest, instead of P16,589.70. In his brief the appellant admits
the figures appearing in the report, with the exception of the interest on
which we shall presently dwell.
1. Revolving the claims under the first group of the report of the
commissioner, the court rejected the recommendation of this official to
the effect that they be declared ordinary credits only, and approved them
as preferred credits. However, in considering the other claims, among
them that of the appellant, classified under the fifth group, the court
approved the recommendation of the commissioner that they be declared
ordinary credits; in other words, the court considered and declared the
claim of the appellant as an ordinary credit just because the latter is at
the same time a debtor of the bank, notwithstanding the fact that his
claim is of the same kind as those classified under the first group,
inasmuch as they are also current account and savings deposits. To this
part of the decision is addressed the appellant’s first assignment of error.
In truth, if the current account, savings, and fixed deposits are preferred
credits for the reasons stated by the court in its decision, we see no
reason why the preference should disappear when the depositors are at
the same time debtors of the bank for amounts less than their credits. If
the ground to declare them preferred credits is sound, the balances
resulting after the set off should likewise be preferred, unless there be a
law providing that a set off, when it takes place, produces such an effect,
a law which does not exist as far as we know.
But we are of the opinion, for the reason presently to be stated, that
current account and savings deposits are not preferred credits in the
cases, like the present, involving the insolvency and liquidation of a bank,
where there are various creditors and it becomes necessary to ascertain
the preference of various credits.
The court held that these deposits should be governed by the Civil Code,
and applying articles 1758 and 1768 of the said Code, ruled that the so-
called irregular deposits being still in vogue, as Manresa, the

commentator, maintains, and as held by this court in the case of Rogers
v. Smith, Bell & Co. (10 Phil., 319), the former are preferred credits
because partaking of the nature of the irregular deposits.
In our opinion, these deposits are essentially mercantile contracts and
should, therefore, be governed by the provisions of the Code of
Commerce, pursuant to its article 2 reading:
"ART. 2. Commercial transactions, be they performed by merchants or
not, whether they are specified in this Code or not, shall be governed by
the provisions contained in the same; in the absence of such provisions,
by the commercial customs generally observed in each place; and in the
absence of both, by those of the common law.
"Commercial transactions shall be considered those enumerated in this
Code and any others of a similar character."
There is cited in support of the application of the Civil Code to these
deposits article 310 of the Code of Commerce providing:
"ART. 310. Notwithstanding the provisions of the foregoing articles,
deposits made with banks, with general warehouses, with loan or any
other associations, shall be governed in the first place by the by-laws of
the same, in the second by the provisions of this Code, and finally by the
rules of common law, which are applicable to all deposits."
But apparently there was a failure to consider that, according to the order
established by the article, the Civil Code or the common law is mentioned
after the Code of Commerce, which means that the provisions of the latter
Code should first be applied before resorting to those of the Civil Code
which are supplementary in character.
The Code of Commerce contains express provisions regulating deposits of
the nature under consideration, and they are articles 303 to 310. The first
and the second to the last of the said articles are as follows:
BANKING | Nature of Funds Deposited | 4
"ART. 303. In order that a deposit may be considered commercial, it is
necessary —
"1. That the depositary, at least, be a merchant.
"2. That the things deposited be commercial objects.
"3. That the deposit constitutes in itself a commercial transaction, or be
made by reason or as a consequence of commercial transactions."
"ART. 309. Whenever, with the consent of the depositor, the depositary
disposes of the articles on deposit either for himself or for his business,
or for transactions intrusted to him by the former, the rights and
obligations of the depositary and of the depositor shall cease, and the
rules and provisions applicable to the commercial loans, commission, or
contract which took the place of the deposit shall be observed." library
In accordance with article 309, the so-called current account and savings
deposits have lost the character of deposits properly so-called, and are
converted into simple commercial loans, because the bank disposed of
the funds deposited by the claimant for its ordinary transactions and for
the banking business in which it was engaged. That the bank had the
authority of the claimant to make use of the money deposited on current
and savings accounts is deducible from the fact that the bank has been
paying interest on both deposits, and the claimant himself asks that he
be allowed interest up to the time when the bank ceased its operations.
Moreover, according to sections 126 of the Corporation Law and 9 of Act
No. 3154, said bank is authorized to make use of the current account,
savings, and fixed deposits provided it retains in its treasury a certain
percentage of the amounts of said deposits. Said sections read:
"SEC. 125. Every such commercial banking corporation shall at all times
have on hand in lawful money of the Philippine Islands or of the United
State, an amount equal to at least eighteen per centum of the aggregate
amount of its deposits in current accounts which are payable on demand
and of its fixed deposits coming due within thirty days. Such commercial
banking corporation shall also at all times maintain reserve equal in

amount to at least five per centum of its total savings deposits. The said
reserve may be maintained in the form of lawful money of the Philippine
Islands or of the United States, or in bonds issued or guaranteed by the
Government of the Philippine Islands or of the United States. . . .
"The percentage of reserve to deposits in the case of the Philippine
National Bank and the Bank of the Philippine Islands is hereby fixed at
eighteen per centum of demand deposits and fixed deposits payable
within thirty days and five per centum of savings deposits, in the same
manner as is prescribed in this section for commercial banking
corporations in general, which reserve against savings deposits may
consist of Philippine Government or United States Government bonds."
"SEC. 9. Every bank organized under this Act shall at all times have on
hand, in lawful money of the Philippine Islands or of the United States, an
amount equal to at least twenty per centum of the aggregate amount of
its deposits. The term lawful money of the Philippine Islands’ shall include
the Treasury certificates authorized by Act Numbered Three thousand and
fifty-eight, and the term ’lawful money of the United States shall include
gold and silver certificates of the United States and bank notes issued by
the Federal Reserve Banks."
Therefore, the bank, without the necessity of the claimant’s consent, was
by law authorized to dispose of the deposits, subject to the limitation
indicated.
We, therefore, conclude that the law applicable to the appellant’s claims
is the Code of Commerce and that his current and savings accounts have
been converted into simple commercial loans.
2. The next point to decide is the applicable law, if any, to determine the
preference of the appellant’s credits, considering that there happens to
be other creditors. Section V of Title I of Book IV of the Code of Commerce
contains provisions relative to the rights of creditors in case of bankruptcy
and to their respective gradation, but these provisions have been
repealed by section 524 of the Code of Civil Procedure reading as follows:
BANKING | Nature of Funds Deposited | 5
"SEC. 524. No new proceedings to be instituted. — No new bankruptcy
proceedings shall be instituted until a new bankruptcy law shall come into
force in the Islands. All existing laws and orders relating to bankruptcy
and proceedings therein are hereby repealed: Provided, That nothing in
this section shall be deemed in any manner to affect pending litigation in
bankruptcy proceedings."
The Philippine Legislature subsequently enacted Act No. 1956, also known
as the Insolvency Law, which took effect on May 20, 1909, containing
provisions regarding preference of credits; but its section 52 provides that
all the provisions of the law shall not apply to corporations engaged
principally in the banking business, and among them should be
understood included the Mercantile Bank of China. Said sections provide:
"SEC. 48. Merchandise, effects, and any other kind of property found
among the property of the insolvent, the ownership of which has not been
conveyed to him by a legal and irrevocable title, shall be considered to be
the property of other persons and shall be placed at the disposal of its
lawful owners on order of the court made at the hearing mentioned in
section forty-three or at any ordinary hearing, is the assignee or any
creditor whose right in the estate of the insolvent has been established
shall petition in writing for such hearing and the court in its discretion
shall to order, the creditors, however, retaining such rights in said
property as belong to the insolvent, and subrogating him whenever they
shall have complied with all obligations concerning said property.
"The following shall be included in this section:
"1. Dowry property inestimado and such property estimado which may
remain in the possession of the husband where the receipt thereof is a
matter of record in a public instrument registered under the provisions of
sections twenty-one and twenty-seven of the Code of Commerce in force.
"2. Paraphernal property which the wife may have acquired by
inheritance, legacy, or donation whether remaining in the form in which
it was received or subrogated or invested in other property, provided that
 BANKING | Nature of Funds Deposited | 6

such investment or subrogation has been registered in the registro "In all cases arising under this paragraph assignees may retain the
mercantile in accordance with the provisions of the sections of the Code merchandise so purchased or claim it for the creditors by paying the price
of Commerce mentioned in the next preceding paragraph. thereof to the vendor.

"3. Property and effects deposited with the bankrupt, or administered, "9. Goods or chattels wrongfully taken, converted, or withheld by the
leased, rented, or held in usufruct by him. insolvent if still existing in his possession or the amount of the value
thereof.
"4. Merchandise in the possession of the bankrupt, on commission, for
purchase, sale, forwarding, or delivery. "SEC. 49. All creditors, except those whose claims are mentioned in the
next following section, whose debts are duly proved and allowed shall be
"5. Bills of exchange or promissory notes without indorsement or other
entitled to share in the property and estate pro rata, after the property
expression transferring ownership remitted to the insolvent for collection
belonging to other persons referred to in the last preceding section has
and all others acquired by him for the account of another person, drawn
been deducted therefrom, without priority or preference whatever:
or indorsed to the remitter direct.
Provided, That any debt proved by any person liable as bail, surety,
guarantor, or otherwise, for the debtor, shall not be paid to the person so
"6. Money remitted to the insolvent, otherwise than on current account,
proving the same until satisfactory evidence shall be produced of the
and which is in his possession for delivery to a definite person in the name
payment of such debt by such person so liable, and the share to which
and for the account of the remitter or for the settlement of claims which
such debt would be entitled may be paid into court, or otherwise held, for
are to be met at the insolvent’s domicile.
the benefit of the party entitled thereto, as the court may direct.
"7. Amounts due the insolvent for sales of merchandise on commission,
and bills of exchange and promissory notes derived therefrom in his "SEC. 50. The following are the preferred claims which shall be paid in
possession, even when the same are not made payable to the owner of the order named:
the merchandise sold, provided it is proven that the obligation to the
"(a) Necessary funeral expenses of the debtor, or of his wife, or children
insolvent is derived therefrom and that said bills of exchange and
who are under their parental authority and have no property of their own,
promissory notes were in the possession of the insolvent for account of
when approved by the court;
the owner of the merchandise to be cashed and remitted, in due time, to
the said owner; all of which shall be a legal presumption when the amount
"(b) Debts due for personal services rendered the insolvent by employees,
involved in any such sale shall not have been credited on the books of
laborers, or domestic servants immediately preceding the
both the owner of the merchandise and of the insolvent.
commencement of proceedings in insolvency;
"8. Merchandise bought on credit by the insolvent so long as the actual
"(c) Compensation due the laborers or their dependents under the
delivery thereof has not been made to him at his store or at any other
provisions of Act Numbered Thirty-four hundred and twenty-eight, known
place stipulated for such delivery, and merchandise the bills of lading or
as the Workmen’s Compensation Act, as amended by Act Numbered
shipping receipts of which have been sent him after the same has been
Thirty-eight hundred and twelve, and under the provisions of Act
loaded by order of the purchaser and for his account and risk.
Numbered Eighteen hundred and seventy-four, known as the Employers’

Liability Act, and of other laws providing for payment of indemnity for
damages in cases of labor accidents;
"(d) Legal expenses, and expenses incurred in the administration of the
insolvent’s estate for the common interest of the creditors, when properly
authorized and approved by the court;
"(e) Debts, taxes, and assessments due the Insular Government;
"(f) Debts, taxes, and assessments due to any province or provinces of
the Philippine Islands;
"(g) Debts, taxes, and assessments due to any municipally or
municipalities of the Philippine Islands;
"All other creditors shall be paid pro rata." (As amended by Act No. 3962.)
"ART. 52. . . . The provisions of this Act shall not apply to corporations
engaged principally in the banking business, or to any other corporation
as to which there is any special provision of law for its liquidation in case
of insolvency."
It appears that even after the enactment of the Insolvency Law there was
no law in this jurisdiction governing the order or preference of credits in
cases of insolvency and liquidation of a bank. But the Philippine
Legislature subsequently enacted Act No. 3519, amending various
sections of the Revised Administrative Code, which took effect on
February 20, 1929, and section 1641 of this latter Code, as amended by
said Act, provides:
"SEC. 1641. Distribution of assets. — In the case of the liquidation of a
bank or banking institution, after payment of the costs of the proceedings,
including reasonable expenses, commissions and fees of the Bank
Commissioner, to be allowed by the court, the Bank Commissioner shall
pay the debts of the institution, under decree of the court in the order of
their legal priority."
BANKING | Nature of Funds Deposited | 7
From this section 1641 we deduce that the intention of the Philippine
Legislature, in providing that the Bank Commissioner shall pay the debts
of the company by virtue of an order of the court in the order of their
legal priority, was to enforce the provisions of sections 48, 49 and 50 of
the Insolvency Law in the sense that they are made applicable to cases
of insolvency or bankruptcy and liquidation of banks. No other deduction
can be made from the phrase "in the order of their legal priority"
employed by the law, for there being no law establishing any priority in
the order of payment of credits, the legislature could not reasonably refer
to any legislation upon the subject, unless the interpretation above stated
is accepted.
Examining now the claims of the appellant, it appears that none of them
falls under any of the cases specified by sections 48, 49 and 50 of the
Insolvency Law; wherefore, we conclude that the appellant’s claims,
consisting of his current and savings accounts, are not preferred credits.
3. The commissioner set off the claims of the appellant against what the
bank had against him. The court approved this set off over the objection
of the appellant. The appellees contend that the set of does not lie in this
case because otherwise it would prejudice them and the other creditors
in the liquidation. We hold that the court’s ruling is not error. "It may be
stated as a general rule that when a depositor is indebted to a bank, and
the debts are mutual — that is, between the same parties and in the same
right — the bank may apply the deposit, or such portion thereof as may
be necessary, to the payment of the debt due it by the depositor, provided
there is no express agreement to the contrary and the deposit is not
specifically applicable to some other particular purpose." (7 Am. Jur., par.
629, p. 455; United States v. Butterworth-Judson Corp., 267 U. S., 387;
National Bank v. Morgan, 207 Ala., 65; Bank of Guntersville v. Crayter,
199 Ala., 599; Tatum v. Commercial Bank & T. Co., 193 Ala., 120; Desha
Bank & T. Co. v. Quilling, 118 Ark., 114; Holloway v. First Nat. Bank, 45
Idaho, 746; Wyman v. Ft. Dearborn Nat. Bank, 181 Ill., 279; Niblack v.
Park Nat. Bank, 169 Ill., 517; First Nat. Bank v. Stapf., 165 Ind., 162;
Bedford Bank v. Acoam, 125 Ind., 584.) The situation referred to by the
appellees is inevitable because section 1639 of the ’Revised
 BANKING | Nature of Funds Deposited | 8

Administrative Code, as amended by Act No. 3519, provides that the Bank in its support and it appears that the assigned error was inserted as a
Commissioner shall reduce the assets of the bank into cash and this mere corollary of the preceding ones.
cannot be done without first liquidating individually the accounts of the
debtors of said bank, and in making this individual liquidation the debtors In view of all the foregoing considerations, we affirm the part of the
are entitled to set off, by way of compensation, their claims against the appealed decision for the reason stated herein, and it is ordered that the
bank. net claim of the appellant, amounting to P13,611.21, is an ordinary and
not a preferred credit, and that he is entitled to charge interest on the
4. The court held that the appellant is not entitled to charge interest on said amount up to September 19, 1931, without special pronouncement
the amounts of his claims, and this is the object of the second assignment as to the costs.
of error. Upon this point a distinction must be made between the interest
which the deposits should earn from their existence until the bank ceased So ordered.
to operate, and that which they may earn from the time the bank’s
operations were stopped until the date of payment of the deposits. As to
the first class, we hold that it should be paid because such interest has
been earned in the ordinary course of the bank’s business and before the
latter has been declared in a state of liquidation. Moreover, the bank being
authorized by law to make use of the deposits, with the limitation stated,
to invest the same in its business and other operations, it may be
presumed that it bound itself to pay interest to the deposits as in fact it
paid interest prior to the dates of the said claims. As to the interest which
may be charged from the date the bank ceased to do business because it
was declared in a state of liquidation, we held that the said interest should
not be paid. Under articles 1101 and 1108 of the Civil Code, interest is
allowed by way of indemnity for damages suffered, in the cases wherein
the obligation consists in the payment of money. In view of this, we hold
that in the absence of any express law or of any applicable provision of
the Code of Commerce, it is not proper to pay this last kind of interest to
the appellant upon his deposits in the bank, for this would be anomalous
and unjustified in a liquidation or insolvency of a bank. This rule should
be strictly observed in the instant case because it is understood that the
assets should be prorated among all the creditors as they are insufficient
to pay all the obligations of the bank.

5. The last assignment of error has to do with the denial by the court of
the claimant’s motion for new trial. No new arguments have been made

G.R. No. 198756 January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING
CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL
BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT
BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL
REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU
OF TREASURY, Respondent.
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest
income arising from the ₱35 billion worth of 10-year zero-coupon treasury
bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or
the PEA Ce Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR
Ruling No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds
being deposit substitutes are subject to the 20% final withholding tax.
Pursuant to this ruling, the Secretary of Finance directed the Bureau of
Treasury to withhold a 20% final tax from the face value of the PEACe
Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed by
petitioners under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011
[and] other related rulings issued by BIR of similar tenor and import, for
being unconstitutional and for having been issued without jurisdiction or
with grave abuse of discretion amounting to lack or· excess of jurisdiction
... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or
collecting the 20% FWT from the payment of the face value of the
Government Bonds upon their maturity;
BANKING | Nature of Funds Deposited | 9
c. COMMAND Respondents, particularly the BTr, to pay the full amount of
the face value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ
of preliminary injunction, enjoining Respondents, particularly the BIR and
the BTr, from withholding or collecting 20% FWT on the Government
Bonds and the respondent BIR from enforcing the assailed 2011 BIR
Ruling, as well asother related rulings issued by the BIR of similar tenor
and import, pending the resolution by [the court] of the merits of [the]
Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO
Networks (CODE-NGO) "with the assistance of its financial advisors, Rizal
Commercial Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC
Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED
Capital Ventures, Inc. (SEED),"5 requested an approval from the
Department of Finance for the issuance by the Bureau of Treasury of 10-
year zerocoupon Treasury Certificates (T-notes).6 The T-notes would
initially be purchased by a special purpose vehicle on behalf of CODE-
NGO, repackaged and sold at a premium to investors as the PEACe
Bonds.7 The net proceeds from the sale of the Bonds"will be used to
endow a permanent fund (Hanapbuhay® Fund) to finance meritorious
activities and projects of accredited non-government organizations
(NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other
proposals for the issuance of zero-coupon bonds were also presented by
banks and financial institutions, such as First Metro Investment
Corporation (proposal dated March 1, 2001),9 International Exchange
Bank (proposal dated July 27, 2000),10 Security Bank Corporation and SB
Capital Investment Corporation (proposal dated July 25, 2001), 11 and
ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-
Kim Eng Fixed Income indicate that the interest income or discount
earned on the proposed zerocoupon bonds would be subject to the
prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than
its face value (or at a deep discount), with the face value repaid at the
time of maturity.14 It does not make periodic interest payments, or have

socalled "coupons," hence the term zero-coupon bond.15 However, the
discount to face value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s
letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-
200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling
No. 020-2001, signed by then Commissioner ofInternal Revenue René G.
Bañez confirmed that the PEACe Bonds would not be classified as deposit
substitutes and would not be subject to the corresponding withholding
tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds
must be obtained from twenty (20) or more individuals or corporate
lenders at any one time. In the light of your representation that the PEACe
Bonds will be issued only to one entity, i.e., Code NGO, the same shall
not be considered as "deposit substitutes" falling within the purview of
the above definition. Hence, the withholding tax on deposit substitutes
will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-
2001 was subsequently reiterated in BIR Ruling No. 035-200119 dated
August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29,
2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced
that to be able to determine whether the financial assets, i.e., debt
instruments and securities are deposit substitutes, the "20 or more
individual or corporate lenders" rule must apply. Moreover, the
determination of the phrase "at any one time" for purposes of determining
the "20 or more lenders" is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be treated
as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer
Eduardo Sergio G. Edeza (Former Treasurer Edeza) questioned the
propriety of issuing the bonds directly to a special purpose vehicle
considering that the latter was not a Government Securities Eligible
Dealer (GSED).22 Former Treasurer Edeza recommended that the
issuance of the Bonds "be done through the ADAPS"23 and that CODE-
NGO "should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of
Treasury Bonds25 (Public Offering) dated October 9, 2001, the Bureau of
Treasury announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds
BANKING | Nature of Funds Deposited | 10
[would] be auctioned on October 16, 2001[.]"26 The notice stated that the
Bonds "shall be issued to not morethan 19 buyers/lenders hence, the
necessity of a manual auction for this maiden issue."27 It also required
the GSEDs to submit their bids not later than 12 noon on auction date
and to disclose in their bid submissions the names of the institutions
bidding through them to ensure strict compliance with the 19 lender
limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and
while taxable shall not be subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo 30 on the
"Formula for the Zero-Coupon Bond." The memo stated inpart that the
formula (in determining the purchase price and settlement amount) "is
only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of
Treasury issued the "Auction Guidelines for the 10-year Zero-Coupon
Treasury Bond to be Issued on October 16, 2001" (Auction
Guidelines).32 The Auction Guidelines reiterated that the Bonds to be
auctioned are "[n]ot subject to 20% withholding tax as the issue will be
limited to a maximum of 19 lenders in the primary market (pursuant to
BIR Revenue Regulation No. 020 2001)."33 The Auction Guidelines, for the
first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-
year zero-coupon bonds.35 Also on the same date, the Bureau of Treasury
issued another memorandum36 quoting excerpts of the ruling issued by
the Bureau of Internal Revenue concerning the Bonds’ exemption from
20% final withholding tax and the opinion of the Monetary Board on
reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding
range was very wide, from as low as 12.248% to as high as
18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction
results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest
bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued
₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for

approximately ₱10.17 billion,43 resulting in a discount of approximately
₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as
the Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45 RCBC Capital agreed to underwrite46 on a firm basis the offering,
distribution and sale of the 35 billion Bonds at the price of
₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement,
CODE-NGO represented that "[a]ll income derived from the Bonds,
inclusive of premium on redemption and gains on the trading of the same,
are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an
issue price of ₱11,995,513,716.51. Petitioners purchased the PEACe
Bonds on different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling
imposing a 20% FWT on the Government Bonds and directing the BTr to
withhold said final tax at the maturity thereof, [allegedly without]
consultation with Petitioners as bond holders, and without conducting any
hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to
a query of the Secretary of Finance on the proper tax treatment of the
discount or interest income derived from the Government Bonds."51 The
Bureau of Internal Revenue, citing three (3) of its rulings rendered in
2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004;
BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling
No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should
be subject to 20% Final Tax on interest income from deposit substitutes.
It is now settled that all treasury bonds (including PEACe Bonds),
regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of
zero-coupon bonds, the discount (i.e. difference between face value and
purchase price/discounted value of the bond) is treated as interest income
BANKING | Nature of Funds Deposited | 11
of the purchaser/holder. Thus, the Php 24.3 interest income should have
been properly subject to the 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr
was not able tocollect the final tax on the discount/interest income
realized by RCBC as a result of the 2001 Rulings. Subsequently, the
issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively
modifies and supersedes the 2001 Rulings by stating that the [1997] Tax
Code is clear that the "term public means borrowing from twenty (20) or
more individual or corporate lenders at any one time." The word "any"
plainly indicates that the period contemplated is the entire term of the
bond, and not merely the point of origination or issuance. . . . Thus, by
taking the PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of the PEACe
Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was
issued by the Philippine Dealing System Holdings Corporation and
Subsidiaries ("PDS Group"). The Memo provides that in view of the
pronouncement of the DOF and the BIR on the applicability of the 20%
FWT on the Government Bonds, no transferof the same shall be allowed
to be recorded in the Registry of Scripless Securities ("ROSS") from 12
October 2011 until the redemption payment date on 18 October 2011.
Thus, the bondholders of record appearing on the ROSS as of 18 October
2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be
imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of
Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-
201157 clarifying that the final withholding tax due on the discount or
interest earned on the PEACe Bonds should "be imposed and withheld not
only on RCBC/CODE NGO but also [on] ‘all subsequent holders of the
Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition,
and/or mandamus (with urgent application for a temporary restraining
order and/or writ of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order
(TRO)60 "enjoining the implementation of BIR Ruling No. 370-2011
against the [PEACe Bonds,] . . . subject to the condition that the 20%
final withholding tax on interest income there from shall be withheld by
the petitioner banks and placed in escrow pending resolution of [the]
petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of
court to intervene and to admit petition-in-intervention62 dated October
27, 2011, which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation
with Urgent Ex Parte Motion to Direct Respondents to Comply with the
TRO."64 They alleged that on the same day that the temporary restraining
order was issued, the Bureau of Treasury paid to petitioners and other
bondholders the amounts representing the face value of the Bonds, net
however of the amounts corresponding to the 20% final withholding tax
on interest income, and that the Bureau of Treasury refused to release
the amounts corresponding to the 20% final withholding tax. 65 On
November 15, 2011, this court directed respondents to: "(1) SHOW
CAUSE why they failed to comply with the October 18, 2011 resolution;
and (2) COMPLY with the Court’s resolution in order that petitioners may
place the corresponding funds in escrow pending resolution of the
petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and
to admit attached petition-in-intervention with comment on the
petitionin-intervention of RCBC and RCBC Capital).67 The motion was
granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance. 69 They
explained that: 1) "the implementation of [BIR Ruling No. 370-2011],
which has already been performed on October 18, 2011 with the
withholding of the 20% final withholding tax on the face value of the
PEACe bonds, is already fait accompli . . . when the Resolution and TRO
were served to and received by respondents BTr and National Treasurer
[on October 19, 2011]";70 and 2) the withheld amount has ipso facto
become public funds and cannot be disbursed or released to petitioners
without congressional appropriation.71 Respondents further aver
that"[i]nasmuch as the . . . TRO has already become moot . . . the
condition attached to it, i.e., ‘that the 20% final withholding tax on
BANKING | Nature of Funds Deposited | 12
interest income therefrom shall be withheld by the banks and placed in
escrow . . .’has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on
the petitions-in-intervention filed by RCBC and RCBC Capital and On
November 27, 2012, petitioners filed their "Manifestation with Urgent
Reiterative Motion (To Direct Respondents to Comply with the Temporary
Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation
with urgent reiterative motion (to direct respondents to comply with the
temporary restraining order); and (b) required respondents to comment
thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed
their reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to
20% final withholding tax under the 1997 National Internal Revenue
Code. Related to this question is the interpretation of the phrase
"borrowing from twenty (20) or more individual or corporate lenders at
any one time" under Section 22(Y) of the 1997 National Internal Revenue
Code, particularly on whether the reckoning of the 20 lenders includes
trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of
these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code
on non-retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting
through the BTr, the Government is obligated . . . to pay the face value
amount of Ph₱35 Billion upon maturity without any deduction
whatsoever."79 They add that "the Government cannot impair the efficacy
of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before
maturity and after several, consistent categorical declarations that such
bonds are exempt from the 20% FWT, without violating due
process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds,
they had the right to expect that they would receive the full face value of
the Bonds upon maturity, in view of the 2001 BIR Rulings.82 "[R]egardless
of whether or not the 2001 BIR Rulings are correct, the fact remains that
[they] relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit
substitutes as defined under Section 22(Y) of the 1997 National Internal
Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005,
and 2011 BIR Rulings "erroneously interpreted that the number of
investors that participate in the ‘secondary market’ is the determining
factor in reckoning the existence or non-existence of twenty (20) or more
individual or corporate lenders."85 Furthermore, they contend that the
Bureau of Internal Revenue unduly expanded the definition of deposit
substitutes under Section 22 of the 1997 National Internal Revenue Code
in concluding that "the mere issuance of government debt instruments
and securities is deemed as falling within the coverage of ‘deposit
substitutes[.]’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an
unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading
gain," which is exempt from income tax.88 They insist that "[t]hey are not
lenders whose income is considered as ‘interest income or yield’ subject
to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal
Revenue Code]"89 because they "acquired the Government Bonds in the
secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit
substitutes, petitioners argue that the collection of the final tax was
BANKING | Nature of Funds Deposited | 13
barred by prescription.91 They point out that under Section 7 of DOF
Department Order No. 141-95,92 the final withholding tax "should have
been withheld at the time of their issuance[.]"93 Also, under Section 203
of the 1997 National Internal Revenue Code, "internal revenuetaxes, such
as the final tax, [should] be assessed within three (3) years after the last
day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011
BIR Ruling without prior notice to them was in violation of their property
rights,95 their constitutional right to due process96 as well as Section 246
of the 1997 National Internal Revenue Code on non-retroactivity of
rulings.97 Allegedly, it would also have "an adverse effect of colossal
magnitude on the investors, both localand foreign, the Philippine capital
market, and most importantly, the country’s standing in the international
commercial community."98 Petitioners explained that "unless enjoined,
the government’s threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in
terms of protection for property rights (including financial assets), degree
of legal protection for lender’s rights, and strength of investor
protection."99 They cited the country’s ranking in the World Economic
Forum: 75th in the world in its 2011–2012 Global Competitiveness Index,
111th out of 142 countries worldwide and 2nd to the last among ASEAN
countries in terms of Strength of Investor Protection, and 105th
worldwide and last among ASEAN countries in terms of Property Rights
Index and Legal Rights Index.100 It would also allegedly "send a
reverberating message to the whole world that there is no certainty,
predictability, and stability of financial transactions in the capital
markets[.]"101 "[T]he integrity of Government-issued bonds and notes
will be greatly shattered and the credit of the Philippine Government will
suffer"102 if the sudden turnaround of the government will be
allowed,103 and it will reinforce "investors’ perception that the level of
regulatory risk for contracts entered into by the Philippine Government is
high,"104 thus resulting in higher interestrate for government-issued debt
instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent
Commissioner of Internal Revenue "gravely and seriously abused her
discretion in the exercise of her rule-making power"106 when she issued
the assailed 2011 BIR Ruling which ruled that "all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders, in clear
disregard of the requirement of twenty (20)or more lenders mandated

under the NIRC."107 They argue that "[b]y her blanket and arbitrary
classification of treasury bonds as deposit substitutes, respondent CIR not
only amended and expanded the NIRC, but effectively imposed a new tax
on privately-placed treasury bonds."108 Petitioners-intervenors RCBC and
RCBC Capital further argue that the 2011 BIR Ruling will cause substantial
impairment of their vested rights109 under the Bonds since the ruling
imposes new conditions by "subjecting the PEACe Bonds to the twenty
percent (20%) final withholding tax notwithstanding the fact that the
terms and conditions thereof as previously represented by the
Government, through respondents BTr and BIR, expressly state that it is
not subject to final withholding tax upon their maturity."110 They added
that "[t]he exemption from the twenty percent (20%) final withholding
tax [was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also
contend that respondent Commissioner of Internal Revenue violated their
rights to due process when she arbitrarily issued the 2011 BIR Ruling
without prior notice and hearing, and the oppressive timing of such ruling
deprived them of the opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds,
petitioners-intervenors RCBC and RCBC Capital claim that respondents
Bureau of Treasury and CODE-NGO should be held liable "as [these]
parties explicitly represented . . . that the said bonds are exempt from
the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the
implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA
378-2011] will have pernicious effects on the integrity of existing
securities, which is contrary to the State policies of stabilizing the financial
system and of developing capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR
Ruling No. DA 378-2011 are "invalid because they contravene Section
22(Y) of the 1997 [NIRC] when the said rulings disregarded the
applicability of the ‘20 or more lender’ rule to government debt
instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the secondary
market instead of holding them until maturity, [it] derived . . . long-term
trading gain[s], not interest income, which [are] exempt . . . under
Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption
BANKING | Nature of Funds Deposited | 14
privilege relating to the issuance of the PEACe Bonds . . . partakes of a
contractual commitment granted by the Government in exchange for a
valid and material consideration [i.e., the issue price paid and savings in
borrowing cost derived by the Government,] thus protected by the non-
impairment clause of the 1987 Constitution"[;]117 and (d) the 2004, 2005,
and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since
no notice of revocation was issued to [it], RCBC and [RCBC Capital] and
petitioners[-bondholders], nor was there any BIR administrative guidance
issued and published[.]"118 CODE-NGO additionally argues that
impleading it in a Rule 65 petition was improper because: (a) it involves
determination of a factual question;119 and (b) it is premature and states
no cause of action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge
the 2011 BIR Ruling violates the doctrines of exhaustion of administrative
remedies and hierarchy ofcourts, resulting in a lack of cause of action that
justifies the dismissal of the petition.121 According to them, "the
jurisdiction to review the rulings of the [Commissioner of Internal
Revenue], after the aggrieved party exhausted the administrative
remedies, pertains to the Court of Tax Appeals."122 They point out that "a
case similar to the present Petition was [in fact] filed with the CTA on
October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled,
‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs.
Commissioner of Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the
petition and petitions-in-intervention.124 They argue that under the guise
of mainly assailing the 2011 BIR Ruling, petitioners are indirectly
attacking the 2004 and 2005 BIR Rulings, of which the attack is legally
prohibited, and the petition insofar as it seeks to nullify the 2004 and
2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section
4.125
Respondents contend that the discount/interest income derived from the
PEACe Bonds is not a trading gain but interest income subject to income
tax.126 They explain that "[w]ith the payment of the Ph₱35 Billion
proceeds on maturity of the PEACe Bonds, Petitioners receive an amount
of money equivalent to about Ph₱24.8 Billion as payment for interest.
Such interest is clearly an income of the Petitioners considering that the

same is a flow of wealth and not merely a return of capital – the capital
initially invested in the Bonds being approximately Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the
PEACe Bonds does not constitute an impairment of the obligations of
contract, respondents aver that: "The BTr has no power to contractually
grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings
cannot be considered a material term of the Bonds"[;]128 "[t]here has
been no change in the laws governing the taxability of interest income
from deposit substitutes and said laws are read into every
contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term
"deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default
by the Government as the latter performed its obligations to the
bondholders in full"[;]131 and "[i]f there was a breach of contract or a
misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the
succeeding purchasers of the PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final
withholding tax on the PEACe Bonds does not amount to a deprivation of
property without due process of law."133 Their imposition of the 20% final
withholding tax is not arbitrary because they were only performing a duty
imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule which
merely interprets the meaning of deposit substitutes [and upheld] the
earlier construction given to the termby the 2004 and 2005 BIR
Rulings."135 Hence, respondents argue that "there was no need to observe
the requirements of notice, hearing, and publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that
Petitioners — all major financial institutions equipped with both internal
and external accounting and compliance departments as wellas access to
both internal and external legal counsel; actively involved in industry
organizations such as the Bankers Association of the Philippines and the
Capital Market Development Council; all actively taking part in the regular
and special debt issuances of the BTr and indeed regularly proposing
products for issue by BTr — had actual notice of the 2004 and 2005 BIR
Rulings."137 Allegedly, "the sudden and drastic drop — including virtually
zero trading for extended periods of six months to almost a year — in the
trading volume of the PEACe Bonds after the release of BIR Ruling No.
007-04 on July 16, 2004 tend to indicate that market participants,
BANKING | Nature of Funds Deposited | 15
including the Petitioners herein, were aware of the ruling and its
consequences for the PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid
exercise of the Commissioner of Internal Revenue’s rule-making
power;139 that it and the 2004 and 2005 BIR Rulings did not unduly
expand the definition of deposit substitutes by creating an unwarranted
exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the point of
origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR
Ruling will not unjustifiably prejudice petitioners.142 "[W]ith or without the
2011 BIR Ruling, Petitioners would be liable topay a 20% final withholding
tax just the same because the PEACe Bonds in their possession are legally
in the nature of deposit substitutes subject to a 20% final withholding tax
under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also
provides that incomederived from Treasury bonds is subject to the 20%
final withholding tax.144 "[W]hile revenue regulations as a general rule
have no retroactive effect, if the revocation is due to the fact that the
regulation is erroneous or contrary to law, such revocation shall have
retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be
invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and
factors affecting a capital market."146 "[C]apital market itself is inherently
unstable."147 Thus, "[p]etitioners’ argument that the 20% final
withholding tax . . . will wreak havoc on the financial stability of the
country is a mere supposition that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that
this order "could no longer be implemented [because] the acts sought to
be enjoined are already fait accompli."149 They add that "to disburse the
funds withheld to the Petitioners at this time would violate Section 29[,]
Article VI of the Constitution prohibiting ‘money being paid out of the
Treasury except in pursuance of an appropriation made by law[.]’"150 "The
remedy of petitioners is to claim a tax refund under Section 204(c) of the
Tax Code should their position be upheld by the Honorable Court."151

Respondents also argue that "the implementation of the TRO would
violate Section 218 of the Tax Code in relation to Section 11 of Republic
Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which
prohibits courts, except the Court of Tax Appeals, from issuing injunctions
to restrain the collection of any national internal revenue tax imposed by
the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC
Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt
status) in the Bonds, represented by the government as an inducement
and important consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because
there was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-
government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave
abuse of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue
of the Commissioner of Internal Revenue’s power to interpret the
BANKING | Nature of Funds Deposited | 16
provisions of the 1997 National Internal Revenue Code and other tax
laws;
b. Commissioner of Internal Revenue merely restates and confirms the
interpretations contained in previously issued BIR Ruling Nos. 007-2004,
DA-491-04,and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her
predecessor’s rulings especially when the latter’s rulings are not in
harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain,
speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20%
final withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative
remedies and of hierarchy of courts.
Court’s ruling
Procedural Issues Non-exhaustion of administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code,
interpretative rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide
Tax Cases. -The power to interpret the provisions of this Code and other
tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance. (Emphasis
supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the
relief prayed for, [then] special civil actions are generally not
entertained."153 The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the
court’s judicial power can be sought.154

Nonetheless, jurisprudence allows certain exceptions to the rule on
exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one
and its flexibility is called upon by the peculiarity and uniqueness of the
factual and circumstantial settings of a case. Hence, it is disregarded (1)
when there is a violation of due process, (2) when the issue involved is
purely a legal question,155 (3) when the administrative action is patently
illegal amounting to lack or excess of jurisdiction,(4) when there is
estoppel on the part of the administrative agency concerned,(5) when
there is irreparable injury, (6) when the respondent is a department
secretary whose acts as an alter ego of the President bears the implied
and assumed approval of the latter, (7) when to require exhaustion of
administrative remedies would be unreasonable, (8) when it would
amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide
a plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention.156 (Emphasis supplied,
citations omitted)
The exceptions under (2) and (11)are present in this case. The question
involved is purely legal, namely: (a) the interpretation of the 20-lender
rule in the definition of the terms public and deposit substitutes under the
1997 National Internal Revenue Code; and (b) whether the imposition of
the 20% final withholding tax on the PEACe Bonds upon maturity violates
the constitutional provisions on non-impairment of contracts and due
process. Judicial intervention is likewise urgent with the impending
maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no
application when the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned
2011 BIR Ruling would be a futile exercise because it was upon the
request of the Secretary of Finance that the 2011 BIR Ruling was issued
by the Bureau of Internal Revenue. It appears that the Secretary of
Finance adopted the Commissioner of Internal Revenue’s opinions as his
own.158 This position was in fact confirmed in the letter159 dated October
10, 2011 where he ordered the Bureau of Treasury to withhold the
amount corresponding to the 20% final withholding tax on the interest or
BANKING | Nature of Funds Deposited | 17
discounts allegedly due from the bondholders on the strength of the 2011
BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of
the Commissioner of Internal Revenue pertains to the Court of Tax
Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011
were issued in connection with the implementation of the 1997 National
Internal Revenue Code on the taxability of the interest income from zero-
coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals),
as amended by Republic Act No. 9282,160 such rulings of the
Commissioner of Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
adversely affected by a decision, ruling or inaction of the Commissioner
of Internal Revenue, the Commissioner of Customs, the Secretary of
Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30) days after
the receipt of such decision or rulingor after the expiration of the period
fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
involving matters arising under the National Internal Revenue Code, the
Tariff and Customs Code or the Local Government Code shall be
maintained, except as herein provided, until and unless an appeal has

been previously filed with the CTA and disposed of in accordance with the
provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.
Blaquera,162 this court emphasized the jurisdiction of the Court of Tax
Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for
certiorari, however, let it be stressed that the jurisdiction to review the
rulings of the Commissioner of Internal Revenue pertains to the Court of
Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings
or opinions of the Commissioner implementing the Tax Code on the
taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under
Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and
regulations. — The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or
analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice
to the power of the Commissioner of Internal Revenue to make rulings or
opinions in connection with the implementation of the provisionsof
internal revenue laws, including ruling on the classification of articles of
sales and similar purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector
of Internal Revenue, but merely an attempt to nullify General Circular No.
V-148, which does not adjudicate or settle any controversy, and that,
accordingly, this case is not within the jurisdiction of the Court of Tax
Appeals.
BANKING | Nature of Funds Deposited | 18
We find no merit in this pretense. General Circular No. V-148 directs the
officers charged with the collection of taxes and license fees to adhere
strictly to the interpretation given by the defendant tothe statutory
provisions abovementioned, as set forth in the Circular. The same
incorporates, therefore, a decision of the Collector of Internal Revenue
(now Commissioner of Internal Revenue) on the manner of enforcement
of the said statute, the administration of which is entrusted by law to the
Bureau of Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court of Tax
Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal
. . . decisions of the Collector of Internal Revenue in . . . matters arising
under the National Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it
when "dictated by public welfare and the advancement of public policy,
or demanded by the broader interest of justice, or the orders complained
of were found to be patent nullities, or the appeal was considered as
clearly an inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v.
The Secretary, Department of Interior and Local Government,165 this
court noted that the petition for prohibition was filed directly before it "in
disregard of the rule on hierarchy of courts. However, [this court] opt[ed]
to take primary jurisdiction over the . . . petition and decide the same on
its merits in viewof the significant constitutional issues raised by the
parties dealing with the tax treatment of cooperatives under existing laws
and in the interest of speedy justice and prompt disposition of the
matter."166
Here, the nature and importance of the issues raised167 to the investment
and banking industry with regard to a definitive declaration of whether
government debt instruments are deposit substitutes under existing laws,
and the novelty thereof, constitute exceptional and compelling
circumstances to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds
but also any other financial instrument or product that may be issued and
traded in the market. Due to the changing positions of the Bureau of
Internal Revenue on this issue, there isa need for a final ruling from this
court to stabilize the expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative
remedies and hierarchy of courts had been rendered moot by this court’s
issuance of the temporary restraining order enjoining the implementation
of the 2011 BIR Ruling. The temporary restraining order effectively
recognized the urgency and necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National
Internal Revenue Code, a final withholdingtax at the rate of 20% is
imposed on interest on any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the
rate of twenty percent (20%) is hereby imposed upon the amount of
interest fromany currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements; . . . Provided, further, That interest income from long-
term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, That should the holder
of the certificate pre-terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
BANKING | Nature of Funds Deposited | 19
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest on currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however,
That interest income derived by a domestic corporation from a depository
bank under the expanded foreign currency deposit system shall be subject
to a final income tax at the rate of seven and one-half percent (7 1/2%)
of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation.
-
(a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties.
- Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, however, That interest income
derived by a resident foreign corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue
Code through Presidential Decree No. 1739168 issued in 1980. Later,

Presidential Decree No. 1959, effective on October 15, 1984, formally
added the definition of deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds
from the public, other than deposits, through the issuance, endorsement,
or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations,
or financing their own needs or the needs of their agent or dealer.These
promissory notes, repurchase agreements, certificates of assignment or
participation and similar instrument with recourse as may be authorized
by the Central Bank of the Philippines, for banks and non-bank financial
intermediaries or by the Securities and Exchange Commission of the
Philippines for commercial, industrial, finance companies and either non-
financial companies: Provided, however, that only debt instruments
issued for inter-bank call loans to cover deficiency in reserves against
deposit liabilities including those between or among banks and quasi-
banks shall not be considered as deposit substitute debt instruments.
(Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree
No. 1959, adopted verbatim the same definition and specifically identified
the following borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial
institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank
loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines, evidenced
by debt instruments denoted as treasury bonds, bills, notes, certificates
of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance
companies, investment companies, trust companies, including the trust
BANKING | Nature of Funds Deposited | 20
department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997
National Internal Revenue Code with the addition of the qualifying phrase
for public – borrowing from 20 or more individual or corporate lenders at
any one time. Under Section 22(Y), deposit substitute is defined thus:
SEC. 22. Definitions- When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of
obtaining funds from the public(the term 'public' means borrowing from
twenty (20) or more individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of relending
or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer. These instruments may
include, but need not be limited to, bankers’ acceptances, promissory
notes, repurchase agreements, including reverse repurchase agreements
entered into by and between the Bangko Sentral ng Pilipinas (BSP) and
any authorized agent bank, certificates of assignment or participation and
similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than
five (5) days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically
defined "public" to mean "twenty (20) or more individual or corporate
lenders at any one time." Hence, the number of lenders is determinative
of whether a debt instrument should be considered a deposit substitute
and consequently subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to
whom the BTr issued the Government Bonds."169 On the other hand,
respondents theorize that the word "any" "indicates that the period
contemplated is the entire term of the bond and not merely the point of
origination or issuance[,]"170 such that if the debt instruments "were
subsequently sold in secondary markets and so on, insuch a way that

twenty (20) or more buyers eventually own the instruments, then it
becomes indubitable that funds would be obtained from the "public" as
defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the
financial market, the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the
surplus units (households and business firms that have savings or excess
funds) flow to the deficit units (mainly business firms and government
that need funds to finance their operations or growth). They bring
suppliers and users of funds together and provide the means by which
the lenders transform their funds into financial assets, and the borrowers
receive these funds now considered as their financial liabilities. The
transfer of funds is represented by a security, such as stocks and bonds.
Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are
commonly classified by the maturity of the securities[,]"173 namely: (1)
the money market, which facilitates the flow of short-term funds (with
maturities of one year or less); and (2) the capital market, which
facilitates the flow of long-term funds (with maturities of more than one
year).174
Whether referring to money marketsecurities or capital market securities,
transactions occur either in the primary market or in the secondary
market.175 "Primary markets facilitate the issuance of new securities.
Secondary markets facilitate the trading of existing securities, which
allows for a change in the ownership of the securities."176 The transactions
in primary markets exist between issuers and investors, while secondary
market transactions exist among investors.177
"Over time, the system of financial markets has evolved from simple to
more complex ways of carrying out financial transactions."178 Still, all
systems perform one basic function: the quick mobilization of money from
the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2)
semidirect finance; and (3) indirect finance.180
BANKING | Nature of Funds Deposited | 21
With direct financing, the "borrower and lender meet each other and
exchange funds in returnfor financial assets"181 (e.g., purchasing bonds
directly from the company issuing them). This method provides certain
limitations such as: (a) "both borrower and lender must desire to
exchange the same amount of funds at the same time"[;]182 and (b) "both
lender and borrower must frequently incur substantial information costs
simply to find each other."183
In semidirect financing, a securities broker or dealer brings surplus and
deficit units together, thereby reducing information costs.184 A
Broker185 is "an individual or financial institution who provides information
concerning possible purchases and sales of securities. Either a buyer or a
seller of securities may contact a broker, whose job is simply to bring
buyers and sellers together."186 A dealer187 "also serves as a middleman
between buyers and sellers, but the dealer actually acquires the seller’s
securities in the hope of selling them at a later time at a more favorable
price."188 Frequently, "a dealer will split up a large issue of primary
securities into smaller units affordable by . . . buyers . . . and thereby
expand the flow of savings into investment."189 In semi direct financing,
"[t]he ultimate lender still winds up holding the borrower’s securities, and
therefore the lender must be willing to accept the risk, liquidity, and
maturity characteristics of the borrower’s [debt security]. There still must
be a fundamental coincidence of wants and needs between [lenders and
borrowers] for semidirect financial transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the
development of indirect financial transactions, carried out with the help
of financial intermediaries"191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual
funds.192 Financial intermediaries accept funds from surplus units and
channel the funds to deficit units.193 "Depository institutions [such as
banks] accept deposits from surplus units and provide credit to deficit
units through loans and purchase of [debt] securities."194 Nondepository
institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same
time purchase debt securities of deficit units.195 "By pooling the resources
of[small savers, a financial intermediary] can service the credit needs of
large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial
transactions in securities performed by market participants that works to

transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any
one time" for purposes of determining the "20 or more lenders" would
mean every transaction executed in the primary or secondary market in
connection with the purchase or sale of securities.
For example, where the financial assets involved are government
securities like bonds, the reckoning of "20 or more lenders/investors" is
made at any transaction in connection with the purchase or sale of the
Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the
primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor
in the secondary market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests
in the bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are
simultaneously obtained from 20 or morelenders/investors, there is
deemed to be a public borrowing and the bonds at that point intime are
deemed deposit substitutes. Consequently, the seller is required to
withhold the 20% final withholding tax on the imputed interest income
from the bonds.
For debt instruments that are not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not
qualify as deposit substitutes under the 1997 National Internal Revenue
Code are subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National
BANKING | Nature of Funds Deposited | 22
Internal Revenue Code discloses a legislative policy to include all income
not expressly exempted as within the class of taxable income under our
laws.
"The definition of gross income isbroad enough to include all passive
incomes subject to specific tax rates or final taxes."197 Hence, interest
income from deposit substitutes are necessarily part of taxable income.
"However, since these passive incomes are already subject to different
rates and taxed finally at source, they are no longer included in the
computation of gross income, which determines taxable
income."198 "Stated otherwise . . . if there were no withholding tax system
in place in this country, this 20 percent portion of the ‘passive’ income of
[creditors/lenders] would actually be paid to the [creditors/lenders] and
then remitted by them to the government in payment of their income
tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons:
first, to provide the taxpayer a convenient manner to meet his probable
income tax liability; second, to ensure the collection of income tax which
can otherwise be lost or substantially reduced through failure to file the
corresponding returns[;] and third, to improve the government’s cash
flow. This results in administrative savings, prompt and efficient collection
of taxes, prevention of delinquencies and reduction of governmental effort
to collect taxes through more complicated means and
remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits
or yield from deposit substitutes is essentially to maximize and expedite
the collection of income taxes by requiring its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for
a specific bond issue, the seller is required to withhold the 20% final
income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the
"gains" contemplated under Section 32(B)(7)(g)203 of the 1997 National
Internal Revenue Code, which exempts gains derived from trading,

redemption, or retirement of long-term securities from ordinary income
tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest,
which represents forbearance for the use of money. Gains from sale or
exchange or retirement of bonds orother certificate of indebtedness fall
within the general category of "gainsderived from dealings in property"
under Section 32(A)(3), while interest from bonds or other certificate of
indebtedness falls within the category of "interests" under Section
32(A)(4).204 The use of the term "gains from sale" in Section 32(B)(7)(g)
shows the intent of Congress not toinclude interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain
realized from the trading of the bonds before their maturity date, which
is the difference between the selling price of the bonds in the secondary
market and the price at which the bonds were purchased by the seller;
and (2) gain realized by the last holder of the bonds when the bonds are
redeemed at maturity, which is the difference between the proceeds from
the retirement of the bonds and the price atwhich such last holder
acquired the bonds. For discounted instruments,like the zero-coupon
bonds, the trading gain shall be the excess of the selling price over the
book value or accreted value (original issue price plus accumulated
discount from the time of purchase up to the time of sale) of the
instruments.206
The Bureau of Internal Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three
2001 BIR Rulings is not consistent with law.207 Its interpretation of "at
any one time" to mean at the point of origination alone is unduly
restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying
on the 2004 and 2005 BIR Rulings) that "all treasury bonds . . .
regardlessof the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes."208 Being the
subject of this petition, it is, thus, declared void because it completely
disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private
corporations when there was none in the law.
BANKING | Nature of Funds Deposited | 23
Tax statutes must be reasonably construed as to give effect to the whole
act. Their constituent provisions must be read together, endeavoring to
make every part effective, harmonious, and sensible.209 That construction
which will leave every word operative will be favored over one that leaves
some word, clause, or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal
Revenue in charge of executing the 1997 National Internal Revenue Code
is an authoritative construction ofgreat weight, but the principle is not
absolute and may be overcome by strong reasons to the contrary. If
through a misapprehension of law an officer has issued an erroneous
interpretation, the error must be corrected when the true construction is
ascertained.
In Philippine Bank of Communications v. Commissioner of Internal
Revenue,211 this court upheld the nullification of Revenue Memorandum
Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal
Revenue because it was contrary to the express provision of Section 230
of the 1977 National Internal Revenue Codeand, hence, "[cannot] be
given weight for to do so would, in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of
excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing,
the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty
is to enforce it, is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored if judicially found
to be erroneous. Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony
with, the law they seek to apply and implement.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head
could not operate to vest a taxpayer with a shield against judicial action
[because] there are no vested rights to speak of respecting a wrong

construction of the law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or
overrule the same."214 In Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc.,215 this court nullified Revenue Memorandum
Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending
investor's tax on pawnshops.216 It was held that "the [Commissioner]
cannot, in the exercise of [its interpretative] power, issue administrative
rulings or circulars not consistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to carry out.
Only Congress can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of
Finance Secretary,218 this court stated that the Commissioner of Internal
Revenue is not bound by the ruling of his predecessors,219 but, to the
contrary, the overruling of decisions is inherent in the interpretation of
laws:
[I]n considering a legislative rule a court is free to make three inquiries:
(i) whether the rule is within the delegated authority of the administrative
agency; (ii) whether itis reasonable; and (iii) whether it was issued
pursuant to proper procedure. But the court is not free to substitute its
judgment as to the desirability or wisdom of the rule for the legislative
body, by its delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments. In
the case of an interpretative rule, the inquiry is not into the validity but
into the correctness or propriety of the rule. As a matter of power a court,
when confronted with an interpretative rule, is free to (i) give the force of
law to the rule; (ii) go to the opposite extreme and substitute its
judgment; or (iii) give some intermediate degree of authoritative weight
to the interpretative rule.
In the case at bar, we find no reason for holding that respondent
Commissioner erred in not considering copra as an "agricultural food
product" within the meaning of § 103(b) of the NIRC. As the Solicitor
General contends, "copra per se is not food, that is, it is not intended for
human consumption. Simply stated, nobody eats copra for food." That
previous Commissioners considered it so, is not reason for holding that
the present interpretation is wrong. The Commissioner of Internal
Revenue is not bound by the ruling of his predecessors. To the contrary,
BANKING | Nature of Funds Deposited | 24
the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at ₱11.996
billion.
It may seem that there was only one lender — RCBC on behalf of CODE-
NGO — to whom the PEACe Bonds were issued at the time of origination.
However, a reading of the underwriting agreement221 and RCBC term
sheet222 reveals that the settlement dates for the sale and distribution by
RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to
various undisclosed investors at a purchase price of approximately
₱11.996 would fall on the same day, October 18, 2001, when the PEACe
Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore,
the entire ₱10.2 billion borrowing received by the Bureau of Treasury in
exchange for the ₱35 billion worth of PEACe Bonds was sourced directly
from the undisclosed number of investors to whom RCBC Capital/CODE-
NGO distributed the PEACe Bonds — all at the time of origination or
issuance. At this point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACe Bonds are deemed deposit substitutes
within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been obliged to
pay the 20% final withholding tax on the interest or discount from the
PEACe Bonds. Further, the obligation to withhold the 20% final tax on the
corresponding interest from the PEACe Bonds would likewise be required
of any lender/investor had the latter turnedaround and sold said PEACe
Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.
We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from longterm

deposits or investments with a holding period of not less than five (5)
years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of
deposit substitutes, the proper procedure was for the Bureau of Treasury
to pay the face value of the PEACe Bonds to the bondholders and for the
Bureau of Internal Revenue to collect the unpaid final withholding tax
directly from RCBC Capital/CODE-NGO, orany lender or investor if such
be the case, as the withholding agents.
The collection of tax is not barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997
National Internal Revenue Code to assess and collect internal revenue
taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failureto file a return, to be
computed from the time of discovery of the falsity, fraud, or omission.
Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except
as provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing of
the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period:
Provided, That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be counted from the
day the return was filed. For purposes of this Section, a return filed before
the last day prescribed by law for the filing thereof shall be considered as
filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or
of failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be filed without assessment, at
any time within ten (10) years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.
BANKING | Nature of Funds Deposited | 25
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe
Bonds to 20 or more lenders/investors, the Bureau of Internal Revenue
may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10
years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues
raised by petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the 20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon
the parties affected."224 Moreover, service may be made personally or by
mail.225 And, "[p]ersonal service is complete upon actual delivery [of the
order.]"226 This court’s temporary restraining order was received only on
October 19, 2011, or a day after the PEACe Bonds had matured and the
20% final withholding tax on the interest income from the same was
withheld.
Publication of news reports in the print and broadcast media, as well as
on the internet, is not a recognized mode of service of pleadings, court
orders, or processes. Moreover, the news reports227 cited by petitioners
were posted minutes before the close of office hours or late in the evening
of October 18, 2011, and they did not givethe exact contents of the
temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an
injunction unless it is shown that suchinjunction or order was served on
him personally or that he had notice of the issuance or making of such
injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect
himself or herself by withholding the tax due"229 and return the amount
of the tax withheld should it be finally determined that the income paid is
not subject to withholding.230 Hence, respondent Bureau of Treasury was
justified in withholding the amount corresponding to the 20% final
withholding tax from the proceeds of the PEACe Bonds, as it received this
court’s temporary restraining order only on October 19, 2011, or the day
after this tax had been withheld.
 BANKING | Nature of Funds Deposited | 26

Respondents’ retention of the amounts withheld is a defiance Bureau of Treasury to the Bureau of Internal Revenue on October 18,
of the temporary restraining order 2011.

Nonetheless, respondents’ continued failure to release to petitioners the Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-
amount corresponding to the 20% final withholding tax in order that it 10395244 dated October 18, 2011 submitted to this court shows:
may be placed in escrow as directed by this court constitutes a defiance
of this court’s temporary restraining order.231 Account Debit Amount Credit
Code Amount
The temporary restraining order is not moot. The acts sought to be Bonds Payable-L/T, 442-360 35,000,000,000.00
enjoined are not fait accompli. For an act to be considered fait accompli, Dom-Zero
the act must have already been fully accomplished and Coupon T/Bonds
consummated.232 It must be irreversible, e.g., demolition of (Peace Bonds) – 10 yr
properties,233 service of the penalty of imprisonment,234 and hearings on Sinking Fund-Cash 198-001 30,033,792,203.59
cases.235 When the act sought to be enjoined has not yet been fully (BSF)
satisfied, and/or is still continuing in nature,236 the defense of fait Due to BIR 412-002 4,966,207,796.41
accomplicannot prosper. To record redemption of
10yr Zero
The temporary restraining order enjoins the entire implementation of the
coupon (Peace Bond)
2011 BIR Ruling that constitutes both the withholding and remittance of
net of the 20% final
the 20% final withholding tax to the Bureau of Internal Revenue. Even
withholding tax
though the Bureau of Treasury had already withheld the 20% final
pursuant to BIR Ruling
withholding tax237 when it received the temporary restraining order, it
No.
had yet to remit the monies it withheld to the Bureau of Internal Revenue,
378-2011, value date,
a remittance which was due only on November 10, 2011.238 The act
October 18, 2011 per
enjoined by the temporary restraining order had not yet been fully
BTr letter authority and
satisfied and was still continuing.
BSP Bank
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which Statements.
prescribes to national government agencies such as the Bureau of
The foregoing journal entry, however, does not prove that the amount of
Treasury the procedure for the remittance of all taxes it withheld to the
₱4,966,207,796.41, representing the 20% final withholding tax on the
Bureau of Internal Revenue, a national agency shall file before the Bureau
PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal
of Internal Revenue a Tax Remittance Advice (TRA) supported by
Revenue on October 18, 2011. The entries merely show that the monies
withholding tax returns on or before the 10th day of the following month
corresponding to 20% final withholding tax was set aside for remittance
after the said taxes had been withheld.240 The Bureau of Internal Revenue
to the Bureau of Internal Revenue.
shall transmit an original copy of the TRA to the Bureau of
Treasury,241 which shall be the basis for recording the remittance of the We recall the November 15, 2011 resolution issued by this court directing
tax collection.242 The Bureau of Internal Revenue will then record the respondents to "show cause why they failed to comply with the [TRO];
amount of taxes reflected in the TRA as tax collection in the Journal ofTax and [to] comply with the [TRO] in order that petitioners may place the
Remittance by government agencies based on its copies of the corresponding funds in escrow pending resolution of the petition."245 The
TRA.243 Respondents did not submit any withholding tax return or TRA to 20% final withholding tax was effectively placed in custodia legiswhen
provethat the 20% final withholding tax was indeed remitted by the this court ordered the deposit of the amount in escrow. The Bureau of

Treasury could still release the money withheld to petitioners for the latter
to place in escrow pursuant to this court’s directive. There was no legal
obstacle to the release of the 20% final withholding tax to petitioners.
Congressional appropriation is not required for the servicing of public
debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel
retirement premiums, government service insurance, and other similar
fixed expenditures, (b) principal and interest on public debt, (c) national
government guarantees of obligations which are drawn upon, are
automatically appropriated: provided, that no obligations shall be
incurred or payments made from funds thus automatically appropriated
except as issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National
Treasury not otherwise appropriated, such amounts as may be necessary
to effect payments on foreign or domestic loans, or foreign or domestic
loans whereon creditors make a call on the direct and indirect guarantee
of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to
government-owned or controlled corporations and/or government
financial institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or private
institutions;
c. government-owned or controlled corporations and/or financial
institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government
owned or controlled corporations and/or government financial
institutions.
The amount of ₱35 billion that includes the monies corresponding to 20%
final withholding tax is a lawfuland valid obligation of the Republic under
BANKING | Nature of Funds Deposited | 27
the Government Bonds. Since said obligation represents a public debt,
the release of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be
used for the payment of Government Bonds may be lawfully taken from
the continuing appropriation out of any monies in the National Treasury
and is not required to be the subject of another appropriation legislation:
SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys
in the National Treasury not otherwise appropriated, or from any sinking
funds provided for the purpose by law, any interest falling due, or
accruing, on any portion of the public debt authorized by law. He shall
also cause to be paid out of any such money, or from any such sinking
funds the principal amount of any obligations which have matured, or
which have been called for redemption or for which redemption has been
demanded in accordance with terms prescribed by him prior to date of
issue. . . In the case of interest-bearing obligations, he shall pay not less
than their face value; in the case of obligations issued at a discount he
shall pay the face value at maturity; or if redeemed prior to maturity,
such portion of the face value as is prescribed by the terms and conditions
under which such obligations were originally issued. There are hereby
appropriated as a continuing appropriation out of any moneys in the
National Treasury not otherwise appropriated, such sums as may be
necessary from time to time to carry out the provisions of this section.
The Secretary of Finance shall transmit to Congress during the first month
of each regular session a detailed statement of all expenditures made
under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that
payment for Treasury bills and bonds shall be made through the National
Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines
maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas
to which all proceeds from the sale of Treasury Bills and Bonds under R.A.
No. 245, as amended, shall be credited and all payments for redemption
of Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic
appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President,
and Congress in the exercise of its own judgment and wisdom formulates
 BANKING | Nature of Funds Deposited | 28

an appropriation act precisely following the process established by the

Constitution, which specifies that no money may be paid from the
Treasury except in accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since

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

Respondent Bureau of Treasury had the duty to obey the temporary

restraining order issued by this court, which remained in full force and
effect, until set aside, vacated, or modified. Its conduct finds no
justification and is reprehensible.247

WHEREFORE, the petition for review and petitions-in-intervention are

GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its

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

Respondent Bureau of Treasury is hereby ORDERED to immediately

·release and pay to the bondholders the amount corresponding-to the
20% final withholding tax that it withheld on October 18, 2011.

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to this Court in a
Petition for Review, on the issue of the right of the drawer to recover from
the drawee bank who pays a check with a forged indorsement of the
payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were forgeries.
The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried
the case, rendered a decision on November 17, 1987 dismissing the
complaint as well as the respondent drawee Bank's counterclaim. On
appeal, the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing the checks was
the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose
negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting
forth the following as the alleged errors of the respondent Court:1
I THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
BANKING | Nature of Funds Deposited | 29
II THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE
NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE
OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO
PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE
CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE
CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN
THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four
grocery stores located at Rizal Avenue Extension and at Second Avenue,
Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank.
To facilitate payment of debts to her suppliers, petitioner draws checks
against her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material
particulars by her trusted bookkeeper, Alicia Galang, an employee for
more than eight (8) years. After the bookkeeper prepared the checks, the
completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the
checks against the corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The issuance and
delivery of the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any verification as

to whether or not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all checks presented
to and paid by the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued,
following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by
the indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner's checking account numbered 30-
00038-1. Most of the aforementioned checks were for amounts in excess
of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No.
652282 issued on September 18, 1984 in favor of Senson Enterprises in
the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to
said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated
April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-
61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No.
620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh.
A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in
Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange
Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh.
D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019
dated March 17, 1984 in favor of Sophy Products in the amount of
P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in
Check No. 589028 dated March 10, 1984 for the amount of P11,520.00
in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the
BANKING | Nature of Funds Deposited | 30
amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks.3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her
current account. It was only after the lapse of more two (2) years that
petitioner found out about the fraudulent manipulations of her
bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were
brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank
at the Buendia branch, who, without authority therefor, accepted them
all for deposit at the Buendia branch to the credit and/or in the accounts
of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close
friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4)
checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest
of the checks were deposited in Account No. 0443-4, under the name of
Benito Lam at the Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on
the checks testified that they did not receive nor even see the subject
checks and that the indorsements appearing at the back of the checks
were not theirs.
The team of auditors from the main office of the respondent drawee Bank
which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under
the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit
slips of the eighty-two (82) checks in question were initialed and/or

approved for deposit by Ernest L. Boon. The Branch Managers of the
Ongpin and Elcaño branches accepted the deposits made in the Buendia
branch and credited the accounts of Alfredo Y. Romero and Benito Lam in
their respective branches.
On November 7, 1984, petitioner made a written demand on respondent
drawee Bank to credit her account with the money value of the eighty-
two (82) checks totalling P1,208.606.89 for having been wrongfully
charged against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint
with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check
drawn against the drawee bank. The payees are not parties to the case.
Rather, it is the drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value of eighty-two
(82) checks paid out by the drawee bank to holders of those checks where
the indorsements of the payees were forged. How and by whom the
forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and
therefore never indorsed the same. The applicable law is the Negotiable
Instruments Law4 (heretofore referred to as the NIL). Section 23 of the
NIL provides:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or
under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of
authority.
Under the aforecited provision, forgery is a real or absolute defense by
the party whose signature is forged. A party whose signature to an
instrument was forged was never a party and never gave his consent to
the contract which gave rise to the instrument. Since his signature does
BANKING | Nature of Funds Deposited | 31
not appear in the instrument, he cannot be held liable thereon by anyone,
not even by a holder in due course. Thus, if a person's signature is forged
as a maker of a promissory note, he cannot be made to pay because he
never made the promise to pay. Or where a person's signature as a
drawer of a check is forged, the drawee bank cannot charge the amount
thereof against the drawer's account because he never gave the bank the
order to pay. And said section does not refer only to the forged signature
of the maker of a promissory note and of the drawer of a check. It covers
also a forged indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision a forged signature
is "wholly inoperative", no one can gain title to the instrument through
such forged indorsement. Such an indorsement prevents any subsequent
party from acquiring any right as against any party whose name appears
prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a party is
precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the
drawer — for example a mail robbery; and (2) where the indorsement
was forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a
duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under
a forged indorsement, the drawer is under duty promptly to report such
fact to the drawee bank.5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the drawee, the drawer

loses his right against the drawee who has debited his account under a
forged indorsement.6 In other words, he is precluded from using forgery
as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her
for her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument to the payee for the purpose of giving
effect thereto.7 The first delivery of the instrument, complete in form, to
the payee who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the instrument from the drawer
of the check to the payee, there can be no valid and binding contract and
no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82)
checks to their respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered them to the Chief
Accountant of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures of the
payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then
indorsed for the second time with the names of Alfredo Y. Romero and
Benito Lam, and were deposited in the latter's accounts as earlier noted.
The second indorsements were all genuine signatures of the alleged
holders. All the eighty-two (82) checks bearing the forged indorsements
of the payees and the genuine second indorsements of Alfredo Y. Romero
and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts
in the Buendia, Ongpin and Elcaño branches of the same bank. The total
amount of P1,208,606.89, represented by eighty-two (82) checks, were
credited and paid out by respondent drawee Bank to Alfredo Y. Romero
BANKING | Nature of Funds Deposited | 32
and Benito Lam, and debited against petitioner's checking account No.
13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot charge the drawer's account for the amount of
said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although a depositor owes
a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active participation of
the latter. Most of the cases involving forgery by an agent or employee
deal with the payee's indorsement. The drawer and the payee often time
shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity
with the signatures of the parties. However, sooner or later, some leak
will show on the drawer's books. It will then be just a question of time
until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar,
the petitioner relied implicitly upon the honesty and loyalty of her
bookkeeper, and did not even verify the accuracy of amounts of the
checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did
not carefully examine the same nor the check stubs and the returned
checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery,
the subsequent forgeries would not have been accomplished. It was not

until two years after the bookkeeper commenced her fraudulent scheme
that petitioner discovered that eighty-two (82) checks were wrongfully
charged to her account, at which she notified the respondent drawee
bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single
complaint had been made, petitioner would have been duty-bound, as far
as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the
other hand, since the record mentions nothing about such a complaint,
the possibility exists that the checks in question covered inexistent sales.
But even in such a case, considering the length of a period of two (2)
years, it is hard to believe that petitioner did not know or realize that she
was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her
that her funds seem to be disappearing or that there may be a leak in her
business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result
in stopping the continuance of the fraudulent scheme. If she fails to take
steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank.9
One thing is clear from the records — that the petitioner failed to examine
her records with reasonable diligence whether before she signed the
checks or after receiving her bank statements. Had the petitioner
examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums
written as amounts payable in the eighty-two (82) checks with the
pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed
those checks, and should have conducted an inquiry as to the reason for
BANKING | Nature of Funds Deposited | 33
the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made
by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the
close of each month, she could have easily discovered the fraud being
perpetrated by Alicia Galang, and could have reported the matter to the
respondent drawee Bank. The respondent drawee Bank then could have
taken immediate steps to prevent further commission of such fraud. Thus,
petitioner's negligence was the proximate cause of her loss. And since it
was her negligence which caused the respondent drawee Bank to honor
the forged checks or prevented it from recovering the amount it had
already paid on the checks, petitioner cannot now complain should the
bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using
the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong
& Shanghai Bank 11 is not applicable to the case at bar because in said
case, the check was fraudulently taken and the signature of the payee
was forged not by an agent or employee of the drawer. The drawer was
not found to be negligent in the handling of its business affairs and the
theft of the check by a total stranger was not attributable to negligence
of the drawer; neither was the forging of the payee's indorsement due to
the drawer's negligence. Since the drawer was not negligent, the drawee
was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored
the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It
is more of a warning to the holder that the check cannot be presented to
the drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for payment
against the drawee bank in the course of normal banking transactions
between banks. The crossed check cannot be presented for payment but

it can only be deposited and the drawee bank may only pay to another
bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank
from having checks with more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash payment with more than
one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of
the said check. In effect, this rule destroys the negotiability of bills/checks
by limiting their negotiation by indorsement of only the payee. Under the
NIL, the only kind of indorsement which stops the further negotiation of
an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is restrictive
which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
so that any subsequent party may be forewarned that ceases to be
negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no
longer transfer his rights as such indorsee where the form of the
indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor
is concerned, such bank may not legally refuse to honor a negotiable bill
of exchange or a check drawn against it with more than one indorsement
if there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the
check by the drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee will make itself
BANKING | Nature of Funds Deposited | 34
liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising
the defense of forgery by reason of her gross negligence. But under
Section 196 of the NIL, any case not provided for in the Act shall be
governed by the provisions of existing legislation. Under the laws
of quasi-delict, she cannot point to the negligence of the respondent
drawee Bank in the selection and supervision of its employees as being
the cause of the loss because negligence is the proximate cause thereof
and under Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the respondent
drawee Bank may be held liable for damages. The article provides —
Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner
as depositor (obligee) and the respondent drawee bank as the obligor. In
the performance of its obligation, the drawee bank is bound by its internal
banking rules and regulations which form part of any contract it enters
into with any of its depositors. When it violated its internal rules that
second endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere approval of
Boon, a chief accountant, it contravened the tenor of its obligation at the
very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the main
office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —
 BANKING | Nature of Funds Deposited | 35

The fault or negligence of the obligor consists in the omission of that loss suffered by the petitioner, considering that she partly benefited from
diligence which is required by the nature of the obligation and corresponds the issuance of the questioned checks since the obligation for which she
with the circumstance of the persons, of the time and of the place. . . . issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be
We hold that banking business is so impressed with public interest where considered as loss of which one half must be paid by respondent drawee
the trust and confidence of the public in general is of paramount bank to herein petitioner.
importance such that the appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence. Surely, respondent SO ORDERED.
drawee Bank cannot claim it exercised such a degree of diligence that is
required of it. There is no way We can allow it now to escape liability for
such negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to share

the loss with the petitioner on a fifty-fifty ratio in accordance with Article
172 which provides:

Responsibility arising from negligence in the performance of every kind of

obligation is also demandable, but such liability may be regulated by the
courts according to the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is
being made clear that the decision to hold the drawee bank liable is based
on law and substantial justice and not on mere equity. And although the
case was brought before the court not on breach of contractual
obligations, the courts are not precluded from applying to the
circumstances of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the
decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court.
And in breaches of contract under Article 1173, due diligence on the part
of the defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the

trial court for the reception of evidence to determine the exact amount of
 BANKING | Nature of Funds Deposited | 36

G.R. No. 149454 May 28, 2004 likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)]."4
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T. The assailed Resolution denied all the parties’ Motions for
YABUT, respondents. Reconsideration.
x ----------------------------- x

G.R. No. 149507 May 28, 2004 The Facts

CASA MONTESSORI INTERNATIONALE, petitioner, The facts of the case are narrated by the CA as follows:
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
"On November 8, 1982, plaintiff CASA Montessori International 5 opened
PANGANIBAN, J.: Current Account No. 0291-0081-01 with defendant BPI[,] with CASA’s
President Ms. Ma. Carina C. Lebron as one of its authorized signatories.
By the nature of its functions, a bank is required to take meticulous care
of the deposits of its clients, who have the right to expect high standards "In 1991, after conducting an investigation, plaintiff discovered that nine
of integrity and performance from it. (9) of its checks had been encashed by a certain Sonny D. Santos since
1990 in the total amount of ₱782,000.00, on the following dates and
Among its obligations in furtherance thereof is knowing the signatures of amounts:
its clients. Depositors are not estopped from questioning wrongful
withdrawals, even if they have failed to question those errors in the ‘Check No. Date Amount
statements sent by the bank to them for verification. 1. 839700 April 24, 1990 ₱ 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
The Case 3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
Before us are two Petitions for Review1 under Rule 45 of the Rules of 5. 839569 Sept. 23, 1990 52,277.00
Court, assailing the March 23, 2001 Decision2 and the August 17, 2001 6. 729149 Mar. 22, 1990 148,000.00
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 63561. The 7. 729129 Mar. 16, 1990 51,015.00
decretal portion of the assailed Decision reads as follows: 8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
"WHEREFORE, upon the premises, the decision appealed from Total --
is AFFIRMED with the modification that defendant bank [Bank of the ₱ 782,600.006
Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of ₱547,115.00 after deductions subject to
"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt
REIMBURSEMENT from third party defendant Yabut who is
Branch [was] a fictitious name used by third party defendant Leonardo T.

Yabut who worked as external auditor of CASA. Third party defendant
voluntarily admitted that he forged the signature of Ms. Lebron and
encashed the checks. "The PNP Crime Laboratory conducted an
examination of the nine (9) checks and concluded that the handwritings
thereon compared to the standard signature of Ms. Lebron were not
written by the latter.
"On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of ₱782,500.007 in the current and savings accounts
of the plaintiff with interest at 6% per annum.
"On February 16, 1999, the RTC rendered the appealed decision in favor
of the plaintiff."8
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA
apportioned the loss between BPI and CASA. The appellate court took into
account CASA’s contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total
amount claimed; and CASA, the other half. It also disallowed attorney’s
fees and moral and exemplary damages.
Hence, these Petitions.9
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:
"I. The Honorable Court of Appeals erred in deciding this case NOT in
accord with the applicable decisions of this Honorable Court to the
effect that forgery cannot be presumed; that it must be proved by clear,
BANKING | Nature of Funds Deposited | 37
positive and convincing evidence; and that the burden of proof lies on the
party alleging the forgery.
"II. The Honorable Court of Appeals erred in deciding this case not in
accord with applicable laws, in particular the Negotiable Instruments
Law (NIL) which precludes CASA, on account of its own negligence, from
asserting its forgery claim against BPI, specially taking into account the
absence of any negligence on the part of BPI."10
In GR No. 149507, Petitioner CASA submits the following issues:
"1. The Honorable Court of Appeals erred when it ruled that ‘there is no
showing that [BPI], although negligent, acted in bad faith x x x’ thus
denying the prayer for the award of attorney’s fees, moral damages and
exemplary damages to [CASA]. The Honorable Court also erred when it
did not order [BPI] to pay interest on the amounts due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that [CASA]
was likewise negligent in the case at bar, thus warranting its conclusion
that the loss in the amount of ₱547,115.00 be ‘apportioned between
[CASA] and [BPI] x x x.’"11
These issues can be narrowed down to three. First, was there forgery
under the Negotiable Instruments Law (NIL)? Second, were any of the
parties negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorney’s fees,
and interest be awarded?
The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507
is partly meritorious.

First Issue: Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a signature is forged or
made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right x x x to enforce payment thereof
against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority."12
Under this provision, a forged signature is a real 13 or absolute
defense,14 and a person whose signature on a negotiable instrument is
forged is deemed to have never become a party thereto and to have never
consented to the contract that allegedly gave rise to it.15
The counterfeiting of any writing, consisting in the signing of another’s
name with intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawer’s
signature on the check.
First, both the CA17 and the RTC18 found that Respondent Yabut himself
had voluntarily admitted, through an Affidavit, that he had forged the
drawer’s signature and encashed the checks.19 He never refuted these
findings.20 That he had been coerced into admission was not corroborated
by any evidence on record.21
Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks,22 had concluded that
the handwritings thereon -- compared to the standard signature of the
drawer -- were not hers.23 This conclusion was the same as that in the
Report24 that the PNP Crime Laboratory had earlier issued to BPI -- the
drawee bank -- upon the latter’s request.
BANKING | Nature of Funds Deposited | 38
Indeed, we respect and affirm the RTC’s factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record.25
Voluntary Admission Not Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights
(1) on custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.26 His Affidavit
was executed in private and before private individuals. 27 The mantle of
protection under Section 12 of Article III of the 1987 Constitution28 covers
only the period "from the time a person is taken into custody for
investigation of his possible participation in the commission of a crime or
from the time he is singled out as a suspect in the commission of a crime
although not yet in custody."29
Therefore, to fall within the ambit of Section 12, quoted above, there must
be an arrest or a deprivation of freedom, with "questions propounded on
him by the police authorities for the purpose of eliciting admissions,
confessions, or any information."30 The said constitutional provision does
"not apply to spontaneous statements made in a voluntary
manner"31 whereby an individual orally admits to authorship of a
crime.32 "What the Constitution proscribes is the compulsory or coercive
disclosure of incriminating facts."33
Moreover, the right against self-incrimination34 under Section 17 of Article
III35 of the Constitution, which is ordinarily available only in criminal
prosecutions, extends to all other government proceedings -- including
civil actions, legislative investigations,36 and administrative proceedings
that possess a criminal or penal aspect37 -- but not to private
investigations done by private individuals. Even in such government
proceedings, this right may be waived,38 provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made.39

If in these government proceedings waiver is allowed, all the more is it
so in private investigations. It is of no moment that no criminal case has
yet been filed against Yabut. The filing thereof is entirely up to the
appropriate authorities or to the private individuals upon whom damage
has been caused. As we shall also explain later, it is not mandatory for
CASA -- the plaintiff below -- to implead Yabut in the civil case before the
lower court.
Under these two constitutional provisions, "[t]he Bill of Rights 40 does not
concern itself with the relation between a private individual and another
individual. It governs the relationship between the individual and the
State."41 Moreover, the Bill of Rights "is a charter of liberties for the
individual and a limitation upon the power of the [S]tate."42 These
rights43 are guaranteed to preclude the slightest coercion by the State
that may lead the accused "to admit something false, not prevent him
from freely and voluntarily telling the truth."44
Yabut is not an accused here. Besides, his mere invocation of the
aforesaid rights "does not automatically entitle him to the constitutional
protection."45 When he freely and voluntarily executed46 his Affidavit, the
State was not even involved. Such Affidavit may therefore be admitted
without violating his constitutional rights while under custodial
investigation and against self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear,
positive and convincing.
Forgery "cannot be presumed."47 It must be established by clear, positive
and convincing evidence.48 Under the best evidence rule as applied to
documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original
writing itself must be produced in court.49 But when, without bad faith on
the part of the offeror, the original checks have already been destroyed
BANKING | Nature of Funds Deposited | 39
or cannot be produced in court, secondary evidence may be
produced.50 Without bad faith on its part, CASA proved the loss or
destruction of the original checks through the Affidavit of the one person
who knew of that fact51 -- Yabut. He clearly admitted to discarding the
paid checks to cover up his misdeed.52 In such a situation, secondary
evidence like microfilm copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz
testified on cross-examination that two different persons had written
them.53 Although no conclusive report could be issued in the absence of
the original checks,54 she affirmed that her findings were 90 percent
conclusive.55 According to her, even if the microfilm copies were the only
basis of comparison, the differences were evident.56 Besides, the RTC
explained that although the Report was inconclusive, no conclusive report
could have been given by the PNP, anyway, in the absence of the original
checks.57 This explanation is valid; otherwise, no such report can ever be
relied upon in court.
Even with respect to documentary evidence, the best evidence rule
applies only when the contents of a document -- such as the drawer’s
signature on a check -- is the subject of inquiry.58 As to whether the
document has been actually executed, this rule does not apply; and
testimonial as well as any other secondary evidence is
admissible.59 Carina Lebron herself, the drawer’s authorized signatory,
testified many times that she had never signed those checks. Her
testimonial evidence is admissible; the checks have not been actually
executed. The genuineness of her handwriting is proved, not only through
the court’s comparison of the questioned handwritings and admittedly
genuine specimens thereof,60 but above all by her.
The failure of CASA to produce the original checks neither gives rise to
the presumption of suppression of evidence61 nor creates an unfavorable
inference against it.62 Such failure merely authorizes the introduction of
secondary evidence63 in the form of microfilm copies. Of no consequence

is the fact that CASA did not present the signature card containing the
signatures with which those on the checks were compared.64 Specimens
of standard signatures are not limited to such a card. Considering that it
was not produced in evidence, other documents that bear the drawer’s
authentic signature may be resorted to.65 Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly
forged signature, one cannot make a definitive comparison that would
establish forgery;66 and that a comparison based on a mere reproduction
of the document under controversy cannot produce reliable results.67 We
have also said, however, that a judge cannot merely rely on a handwriting
expert’s testimony,68 but should also exercise independent judgment in
evaluating the authenticity of a signature under scrutiny.69 In the present
case, both the RTC and the CA conducted independent examinations of
the evidence presented and arrived at reasonable and similar conclusions.
Not only did they admit secondary evidence; they also appositely
considered testimonial and other documentary evidence in the form of
the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed
earlier, the first of these has been met.70 The result of examining a
questioned handwriting, even with the aid of experts and scientific
instruments, may be inconclusive;71 but it is a non sequitur to say that
such result is not clear, positive and convincing. The preponderance of
evidence required in this case has been satisfied.72
Second Issue: Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the
drawee -- erred in making payments by virtue thereof. The forged
signatures are wholly inoperative, and CASA -- the drawer whose
authorized signatures do not appear on the negotiable instruments --
cannot be held liable thereon. Neither is the latter precluded from setting
up forgery as a real defense.
BANKING | Nature of Funds Deposited | 40
Clear Negligence in Allowing Payment Under a Forged Signature
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, the highest
degree of diligence73 is expected,74 and high standards of integrity and
performance are even required, of it.75 By the nature of its functions, a
bank is "under obligation to treat the accounts of its depositors with
meticulous care,76 always having in mind the fiduciary nature of their
relationship."77
BPI contends that it has a signature verification procedure, in which
checks are honored only when the signatures therein are verified to be
the same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery.
Its negligence consisted in the omission of that degree of diligence
required78 of a bank. It cannot now feign ignorance, for very early on we
have already ruled 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
the payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged."79 In fact, BPI was the same bank involved when we issued this
ruling seventy years ago.
Neither Waiver nor Estoppel Results from Failure to Report Error
in Bank Statement
The monthly statements issued by BPI to its clients contain a notice
worded as follows: "If no error is reported in ten (10) days, account will
be correct."80 Such notice cannot be considered a waiver, even if CASA
failed to report the error. Neither is it estopped from questioning the
mistake after the lapse of the ten-day period.
This notice is a simple confirmation81 or "circularization" -- in accounting
parlance -- that requests client-depositors to affirm the accuracy of items

recorded by the banks.82 Its purpose is to obtain from the depositors a
direct corroboration of the correctness of their account balances with their
respective banks.83 Internal or external auditors of a bank use it as a basic
audit procedure84 -- the results of which its client-depositors are neither
interested in nor privy to -- to test the details of transactions and balances
in the bank’s records.85 Evidential matter obtained from independent
sources outside a bank only serves to provide greater assurance of
reliability86 than that obtained solely within it for purposes of an audit of
its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be
detected87 for various reasons. One, materiality is a consideration in audit
planning;88 and two, the information obtained from such a substantive
test is merely presumptive and cannot be the basis of a valid waiver.89 BPI
has no right to impose a condition unilaterally and thereafter consider
failure to meet such condition a waiver. Neither may CASA renounce a
right90 it has never possessed.91
Every right has subjects -- active and passive. While the active subject is
entitled to demand its enforcement, the passive one is duty-bound to
suffer such enforcement.92
On the one hand, BPI could not have been an active subject, because it
could not have demanded from CASA a response to its notice. Besides,
the notice was a measly request worded as follows: "Please examine x x
x and report x x x."93 CASA, on the other hand, could not have been a
passive subject, either, because it had no obligation to respond. It could
-- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own
deed or representation, anything contrary to that established as the truth,
in legal contemplation.94 Our rules on evidence even make a juris et de
jure presumption95 that whenever one has, by one’s own act or omission,
intentionally and deliberately led another to believe a particular thing to
BANKING | Nature of Funds Deposited | 41
be true and to act upon that belief, one cannot -- in any litigation arising
from such act or omission -- be permitted to falsify that supposed truth.96
In the instant case, CASA never made any deed or representation that
misled BPI. The former’s omission, if any, may only be deemed an
innocent mistake oblivious to the procedures and consequences of
periodic audits. Since its conduct was due to such ignorance founded upon
an innocent mistake, estoppel will not arise.97 A person who has no
knowledge of or consent to a transaction may not be estopped by
it.98 "Estoppel cannot be sustained by mere argument or doubtful
inference x x x."99 CASA is not barred from questioning BPI’s error even
after the lapse of the period given in the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious payee,
BPI -- the drawee bank -- becomes liable to its depositor-drawer. Since
the encashing bank is one of its branches,101 BPI can easily go after it and
hold it liable for reimbursement.102 It "may not debit the drawer’s
account103 and is not entitled to indemnification from the drawer."104 In
both law and equity, when one of two innocent persons "must suffer by
the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into
the power of the third person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that cause
which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without which the result
would not have occurred."107
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."108 In the performance
of that obligation, it is bound by its internal banking rules and regulations
that form part of the contract it enters into with its depositors.109

Unfortunately, it failed in that regard. First, Yabut was able to open a
bank account in one of its branches without privity;110 that is, without the
proper verification of his corresponding identification papers. Second, BPI
was unable to discover early on not only this irregularity, but also the
marked differences in the signatures on the checks and those on the
signature card. Third, despite the examination procedures it conducted,
the Central Verification Unit111 of the bank even passed off these evidently
different signatures as genuine. Without exercising the required prudence
on its part, BPI accepted and encashed the eight checks presented to it.
As a result, it proximately contributed to the fraud and should be held
primarily liable112 for the "negligence of its officers or agents when acting
within the course and scope of their employment."113 It must bear the
loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is
recognized as an exception114 to the general rule that a forged signature
is wholly inoperative.115 Contrary to BPI’s claim, however, we do not find
CASA negligent in handling its financial affairs. CASA, we stress, is not
precluded from setting up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and
determine objectively if the financial statements submitted for audit by a
corporation have been prepared in accordance with the appropriate
financial reporting practices116 of private entities. The relationship that
arises therefrom is both legal and moral.117 It begins with the execution
of the engagement letter118 that embodies the terms and conditions of
the audit and ends with the fulfilled expectation of the auditor’s
ethical119 and competent performance in all aspects of the audit.120
The financial statements are representations of the client; but it is the
auditor who has the responsibility for the accuracy in the recording of
BANKING | Nature of Funds Deposited | 42
data that underlies their preparation, their form of presentation, and the
opinion121 expressed therein.122 The auditor does not assume the role of
employee or of management in the client’s conduct of operations 123 and
is never under the control or supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He handled its
monthly bank reconciliations and had access to all relevant documents
and checkbooks.126 In him was reposed the client’s127 trust and
confidence128 that he would perform precisely those functions and apply
the appropriate procedures in accordance with generally accepted
auditing standards.129 Yet he did not meet these expectations. Nothing
could be more horrible to a client than to discover later on that the person
tasked to detect fraud was the same one who perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not equipollent with
discernment.
Besides, in the internal accounting control system prudently installed by
CASA,130 it was Yabut who should examine those documents in order to
prepare the bank reconciliations.131 He owned his working papers,132 and
his output consisted of his opinion as well as the client’s financial
statements and accompanying notes thereto. CASA had every right to
rely solely upon his output -- based on the terms of the audit engagement
-- and could thus be unwittingly duped into believing that everything was
in order. Besides, "[g]ood faith is always presumed and it is the burden
of the party claiming otherwise to adduce clear and convincing evidence
to the contrary."133
Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received

the December 1990 bank statement only in January 1991134 -- when she
was also informed of the forgery for the first time, after which she
immediately requested a "stop payment order." She cannot be faulted for
the late detection of the forged December check. After all, the bank
account with BPI was not personal but corporate, and she could not be
expected to monitor closely all its finances. A preschool teacher charged
with molding the minds of the youth cannot be burdened with the
intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month,
but not presented for payment within that period, will not be reflected
therein.135 An experienced auditor with intent to defraud can easily
conceal any devious scheme from a client unwary of the accounting
processes involved by manipulating the cash balances on record --
especially when bank transactions are numerous, large and frequent.
CASA could only be blamed, if at all, for its unintelligent choice in the
selection and appointment of an auditor -- a fault that is not tantamount
to negligence.
Negligence is not presumed, but proven by whoever alleges it.136 Its mere
existence "is not sufficient without proof that it, and no other
cause,"137 has given rise to damages.138 In addition, this fault is common
to, if not prevalent among, small and medium-sized business entities,
thus leading the Professional Regulation Commission (PRC), through the
Board of Accountancy (BOA), to require today not only accreditation for
the practice of public accountancy,139 but also the registration of firms in
the practice thereof. In fact, among the attachments now required upon
registration are the code of good governance 140 and a sworn statement
on adequate and effective training.141
The missing checks were certainly reported by the bookkeeper 142 to the
accountant143 -- her immediate supervisor -- and by the latter to the
auditor. However, both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no irregularities.
BANKING | Nature of Funds Deposited | 43
The bookkeeper144 who had exclusive custody of the checkbooks145 did
not have to go directly to CASA’s president or to BPI. Although she
rightfully reported the matter, neither an investigation was conducted nor
a resolution of it was arrived at, precisely because the person at the top
of the helm was the culprit. The vouchers, invoices and check stubs in
support of all check disbursements could be concealed or fabricated --
even in collusion -- and management would still have no way to verify its
cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no
fault of CASA. If auditors may be held liable for breach of contract and
negligence,146 with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the
discretion to pursue BPI alone under the NIL, by reason of expediency or
munificence or both. Money paid under a mistake may rightfully be
recovered,147 and under such terms as the injured party may choose.
Third Issue: Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad
faith,149 moral damages cannot be awarded.150 The adverse result of an
action does not per se make the action wrongful, or the party liable for it.
One may err, but error alone is not a ground for granting such
damages.151 While no proof of pecuniary loss is necessary therefor -- with
the amount to be awarded left to the court’s discretion152 -- the claimant
must nonetheless satisfactorily prove the existence of its factual
basis153 and causal relation154 to the claimant’s act or omission.155
Regrettably, in this case CASA was unable to identify the particular
instance -- enumerated in the Civil Code -- upon which its claim for moral
damages is predicated.156 Neither bad faith nor negligence so gross that

it amounts to malice157 can be imputed to BPI. Bad faith, under the law,
"does not simply connote bad judgment or negligence; 158 it imports a
dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill
will that partakes of the nature of fraud."159
As a general rule, a corporation -- being an artificial person without
feelings, emotions and senses, and having existence only in legal
contemplation -- is not entitled to moral damages,160 because it cannot
experience physical suffering and mental anguish.161 However, for breach
of the fiduciary duty required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by such breach, and
social humiliation results therefrom.162 CASA was unable to prove that
BPI had debased the good reputation of,163 and consequently caused
incalculable embarrassment to, the former. CASA’s mere allegation or
supposition thereof, without any sufficient evidence on record, 164 is not
enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary
damages cannot be recovered as a matter of right.167 As we have said
earlier, there is no bad faith on the part of BPI for paying the checks of
CASA upon forged signatures. Therefore, the former cannot be said to
have acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.168 The latter, having no right to moral damages, cannot demand
exemplary damages.169
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to
litigate,170 we find that CASA is entitled to reasonable attorney’s fees
based on "factual, legal, and equitable justification."171
BANKING | Nature of Funds Deposited | 44
When the act or omission of the defendant has compelled the plaintiff to
incur expenses to protect the latter’s interest,172 or where the court
deems it just and equitable,173 attorney’s fees may be recovered. In the
present case, BPI persistently denied the claim of CASA under the NIL to
recredit the latter’s account for the value of the forged checks. This denial
constrained CASA to incur expenses and exert effort for more than ten
years in order to protect its corporate interest in its bank account.
Besides, we have already cautioned BPI on a similar act of negligence it
had committed seventy years ago, but it has remained unrelenting.
Therefore, the Court deems it just and equitable to grant ten percent
(10%)174 of the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the
latter to resort to the courts to obtain payment, legal interest may be
adjudicated at the discretion of the Court, the same to run from the
filing175 of the Complaint.176 Since a court judgment is not a loan or a
forbearance of recovery, the legal interest shall be at six percent (6%) per
annum.177 "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 x x x legal interest,
which is six percent per annum."178 The actual base for its computation
shall be "on the amount finally adjudged,"179 compounded180 annually to
make up for the cost of money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract.182 Because BPI
evidently breached its contract of deposit with CASA, we award interest
in addition to the total amount adjudged. Under Section 196 of the NIL,
any case not provided for shall be "governed by the provisions of existing
legislation or, in default thereof, by the rules of the law
merchant."183 Damages are not provided for in the NIL. Thus, we resort
to the Code of Commerce and the Civil Code. Under Article 2 of the Code
of Commerce, acts of commerce shall be governed by its provisions and,
 BANKING | Nature of Funds Deposited | 45

"in their absence, by the usages of commerce generally observed in each

place; and in the absence of both rules, by those of the civil law."184 This
law being silent, we look at Article 18 of the Civil Code, which states: "In
matters which are governed by the Code of Commerce and special laws,
their deficiency shall be supplied" by its provisions. A perusal of these
three statutes unmistakably shows that the award of interest under our
civil law is justified.

WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that

in GR No. 149507 PARTLY GRANTED. The assailed Decision of the Court
of Appeals is AFFIRMED with modification: BPI is held liable for
₱547,115, the total value of the forged checks less the amount already
recovered by CASA from Leonardo T. Yabut, plus interest at the legal rate
of six percent (6%) per annum -- compounded annually, from the filing
of the complaint until paid in full; and attorney’s fees of ten percent (10%)
thereof, subject to reimbursement from Respondent Yabut for the entire
amount, excepting attorney’s fees. Let a copy of this Decision be
furnished the Board of Accountancy of the Professional Regulation
Commission for such action as it may deem appropriate against
Respondent Yabut. No costs.

SO ORDERED.

ESTAFA
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY
FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.:
This is a petition for prohibition and injunction with a prayer for the
immediate issuance of restraining order and/or writ of preliminary
injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court
on the same date, a temporary restraining order was duly issued ordering
the respondents, their officers, agents, representatives and/or person or
persons acting upon their (respondents') orders or in their place or stead
to refrain from proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On
January 24, 1983, private respondent Clement David filed a motion to lift
restraining order which was denied in the resolution of this Court dated
May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit
public respondents from proceeding with the preliminary investigation of
I.S. No. 81-31938, in which petitioners were charged by private
respondent Clement David, with estafa and violation of Central Bank
Circular No. 364 and related regulations regarding foreign exchange
transactions principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private
respondent's principal witness and the evidence through said witness,
showed that petitioners' obligation is civil in nature.
BANKING | Nature of Funds Deposited | 46
For purposes of brevity, We hereby adopt the antecedent facts narrated
by the Solicitor General in its Comment dated June 28,1982, as follows:
On December 23,1981, private respondent David filed I.S. No. 81-31938
in the Office of the City Fiscal of Manila, which case was assigned to
respondent Lota for preliminary investigation (Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan
Association, Inc., namely Homero Gonzales, Juan Merino, Flavio
Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B.
Dionisio, and one John Doe) with estafa and violation of Central Bank
Circular No. 364 and related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex "A"):
"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments
by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner
Martin, then NSLA Executive Vice-President of NSLA and petitioner
Santos, then NSLA General Manager; that on March 21, 1981 N LA was
placed under receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on July 22,
1981 David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the records of NSLA;
that, therefore, the respondents in I.S. No. 81-31938 misappropriated
the balance of the investments, at the same time violating Central Bank
Circular No. 364 and related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition,
Annex' B') in which they stated the following.
"That Martin became President of NSLA in March 1978 (after the
resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that because
NSLA was urgently in need of funds and at David's insistence, his
investments were treated as special- accounts with interest above the
legal rate, an recorded in separate confidential documents only a portion
of which were to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total investments;
that all transactions with David were recorded except the sum of
US$15,000.00 which was a personal loan of Santos; that David's check
for US$50,000.00 was cleared through Guingona, Jr.'s dollar account
because NSLA did not have one, that a draft of US$30,000.00 was placed
in the name of one Paz Roces because of a pending transaction with her;
that the Philippine Deposit Insurance Corporation had already reimbursed
David within the legal limits; that majority of the stockholders of NSLA
had filed Special Proceedings No. 82-1695 in the Court of First Instance
to contest its (NSLA's) closure; that after NSLA was placed under
receivership, Martin executed a promissory note in David's favor and
caused the transfer to him of a nine and on behalf (9 1/2) carat diamond
ring with a net value of P510,000.00; and, that the liabilities of NSLA to
David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C')
stated the following:
"That he had no hand whatsoever in the transactions between David and
NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he placed
his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona,
Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured
BANKING | Nature of Funds Deposited | 47
payment of those amounts with second mortgages over two (2) parcels
of land under a deed of Second Real Estate Mortgage (Petition, Annex
"E") in which it was provided that the mortgage over one (1) parcel shall
be cancelled upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case
No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to
effect the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota,
petitioners moved to dismiss the charges against them for lack of
jurisdiction because David's claims allegedly comprised a purely civil
obligation which was itself novated. Fiscal Lota denied the motion to
dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed
the instant petition because: (a) the production of the Promisory Notes,
Banker's Acceptance, Certificates of Time Deposits and Savings Account
allegedly showed that the transactions between David and NSLA were
simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal
witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to
David's claim that some of his investments were not record (Petition, pp.
8-9).
Petitioners alleged that they did not exhaust available administrative
remedies because to do so would be futile (Petition, p. 9) [pp. 153-157,
rec.].
As correctly pointed out by the Solicitor General, the sole issue for
resolution is whether public respondents acted without jurisdiction when
they investigated the charges (estafa and violation of CB Circular No. 364
and related regulations regarding foreign exchange transactions) subject
matter of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil
in nature and therefore, public respondents have no jurisdiction over the
charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in
the Office of the City Fiscal of Manila by private respondent David against
petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G.
Santos, together with one Robert Marshall and the other directors of the
Nation Savings and Loan Association, will show that from March 20, 1979
to March, 1981, private respondent David, together with his sister, Denise
Kuhne, invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings
account deposits covered by passbook nos. 6-632 and 29-742, or a total
of P1,159,078.14 (pp. 15-16, roc.). It appears further that private
respondent David, together with his sister, made investments in the
aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed
under receivership on March 21, 1981, petitioners Guingona and Martin,
upon the request of private respondent David, assumed the obligation of
the bank to private respondent David by executing on June 17, 1981 a
joint promissory note in favor of private respondent acknowledging an
indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of
indebtedness assumed appears to be bigger than the original claim
because of the added interest and the inclusion of other deposits of
private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed
to divide the said indebtedness, and petitioner Guingona executed
another promissory note antedated to June 17, 1981 whereby he
personally acknowledged an indebtedness of P668,307.01 (1/2 of
P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of
private respondent (p. 25, rec.). The aforesaid promissory notes were
BANKING | Nature of Funds Deposited | 48
executed as a result of deposits made by Clement David and Denise
Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private
respondent David, before this Court indisputably show that he has indeed
invested his money on time and savings deposits with the Nation Savings
and Loan Association.
It must be pointed out that when private respondent David invested his
money on nine. and savings deposits with the aforesaid bank, the contract
that was perfected was a contract of simple loan or mutuum and not a
contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:
Article 1980. Fixed, savings, and current deposits of-money in banks and
similar institutions shall be governed by the provisions concerning simple
loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119
[1975], We said:
It should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are hat true deposits. are considered simple
loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re
Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association 65 Phil. 375; Fletcher American National Bank vs.
Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit
CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of
the Philippines (96 SCRA 102 [1980]) that:
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by

the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62
Phil. 519). Current and saving deposits, are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank was in
turn a debtor of petitioner. Failure of the respondent Bank to honor the
time deposit is failure to pay its obligation as a debtor and not a breach
of trust arising from a depositary's failure to return the subject matter of
the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation
Savings and Loan Association is that of creditor and debtor; consequently,
the ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits
and to pay withdrawals. While the Bank has the obligation to return
the amount deposited, it has, however, no obligation to return or deliver
the same money that was deposited. And, the failure of the Bank to
return the amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.
WE have already laid down the rule that:
In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver
or return the some money, goods or personal property that he
received Petitioners had no such obligation to return the same money,
i.e., the bills or coins, which they received from private respondents. This
is so because as clearly as stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money that
petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.
BANKING | Nature of Funds Deposited | 49
"Art. 1933. — By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use the
same for a certain time- and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned
while in simple loan, ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple
loan (mutuum), as contrasted to commodatum the borrower acquires
ownership of the money, goods or personal property borrowed Being the
owner, the borrower can dispose of the thing borrowed (Article 248, Civil
Code) and his act will not be considered misappropriation thereof' (Yam
vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any
incipient criminal liability was deemed avoided, because when the
aforesaid bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank
or petitioners Guingona and Martin to pay the deposits of private

respondent would not constitute a breach of trust but would merely be a
failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal
liability, it may however, prevent the rise of criminal liability as long as it
occurs prior to the filing of the criminal information in court. Thus,
in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:
As pointed out in People vs. Nery, novation prior to the filing of the
criminal information — as in the case at bar — may convert the relation
between the parties into an ordinary creditor-debtor relation, and place
the complainant in estoppel to insist on the original transaction or "cast
doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA
578, 580-581 [1983] ), this Court reiterated the ruling in People vs.
Nery ( 10 SCRA 244 [1964] ), declaring that:
The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the
original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense
against the state, only the latter can renounce it (People vs. Gervacio, 54
Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil.
620).
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent
the rise of criminal habihty or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility, as when money loaned is made to
BANKING | Nature of Funds Deposited | 50
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs.
People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and
Martin executed a promissory note on June 17, 1981 assuming the
obligation of the bank to private respondent David; while the criminal
complaint for estafa was filed on December 23, 1981 with the Office of
the City Fiscal. Hence, it is clear that novation occurred long before the
filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be
avoided but there will still be a civil liability on the part of petitioners
Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of
Central Bank Circular No. 364 and other related regulations regarding
foreign exchange transactions by accepting foreign currency deposit in
the amount of US$75,000.00 without authority from the Central Bank.
They contend however, that the US dollars intended by respondent David
for deposit were all converted into Philippine currency before acceptance
and deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to
make a deposit of bank draft issued in his name in the amount of
US$50,000.00 with the Nation Savings and Loan Association, the same
had to be cleared first and converted into Philippine currency. Accordingly,
the bank draft was endorsed by respondent David to petitioner Guingona,
who in turn deposited it to his dollar account with the Security Bank and
Trust Company. Petitioner Guingona merely accommodated the request
of the Nation Savings and loan Association in order to clear the bank draft
through his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the same in
order to be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into
Philippine pesos before they were accepted and deposited in Nation
Savings and Loan Association, because the bank is presumed to have
followed the ordinary course of the business which is to accept deposits
in Philippine currency only, and that the transaction was regular and fair,
in the absence of a clear and convincing evidence to the contrary (see
paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein
petitioners despite the fact that it was raised. in petitioners' reply filed on
May 7, 1982 to private respondent's comment and in the July 27, 1982
reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to
the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation
Savings and Loan Association. Considering that this might adversely
affect his case, respondent David should have promptly denied
petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil
in nature and that there is no clear showing that they engaged in foreign
exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even
if the petitioners could have appealed to the Ministry of Justice, would
work great injustice to petitioners and would render meaningless the
proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject
of prohibition and injunction, this court has recognized the resort to the
extraordinary writs of prohibition and injunction in extreme cases, thus:
On the issue of whether a writ of injunction can restrain the proceedings
in Criminal Case No. 3140, the general rule is that "ordinarily, criminal
prosecution may not be blocked by court prohibition or injunction."
BANKING | Nature of Funds Deposited | 51
Exceptions, however, are allowed in the following instances:
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and
vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or
was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93
SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557
[1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622
[1966]), We held that:
The writs of certiorari and prohibition, as extraordinary legal remedies,
are in the ultimate analysis, intended to annul void proceedings; to
prevent the unlawful and oppressive exercise of legal authority and to
provide for a fair and orderly administration of justice. Thus, in Yu Kong
Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for
certiorari and prohibition although the accused in the case could have
appealed in due time from the order complained of, our action in the
premises being based on the public welfare policy the advancement of
public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a
petition to restrain the prosecution of certain chiropractors although, if
convicted, they could have appealed. We gave due course to their petition
for the orderly administration of justice and to avoid possible oppression
by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil.
627, the petition for certiorari challenging the trial court's action admitting
an amended information was sustained despite the availability of appeal
at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT.
COSTS AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.

ESTAFA
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA;
EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR.,
JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B.
RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA
RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.
CONCEPCION, JR., J.:
Petition for mandamus and prohibition, with preliminary injunction, that
seeks the establishment of joint and solidary liability to the amount of
Three Hundred Fifty Thousand Pesos, with interest, against respondent
Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to
return the time deposits made by petitioner and assigned to him, on the
ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect
depositors and the general public.1 Petitioner also prays that both
respondent banks be ordered to execute the proper and necessary
documents to constitute all properties fisted in Annex "7" of the Answer
of respondent Central Bank of the Philippines in G.R. No. L-29352,
entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into
a trust fund in favor of petitioner and all other depositors of respondent
Overseas Bank of Manila. It is also prayed that the respondents be
prohibited permanently from honoring, implementing, or doing any act
predicated upon the validity or efficacy of the deeds of mortgage,
assignment. and/or conveyance or transfer of whatever nature of the
properties listed in Annex "7" of the Answer of respondent Central Bank
in G.R. No. 29352.2
A sought for ex-parte preliminary injunction against both respondent
banks was not given by this Court.
BANKING | Nature of Funds Deposited | 52
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time
deposit, for one year with 6% interest, of One Hundred Fifty Thousand
Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with
6-½% interest, on March 6, 1967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila.4
On August 31, 1968, Concepcion Maneja, married to Felixberto M.
Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her
time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned
time deposits from the respondent Overseas Bank of Manila, dating from
December 6, 1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Respondent Central Bank admits that it is charged with the duty of
administering the banking system of the Republic and it exercises
supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a
most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims
that as of March 12, 1965, the Overseas Bank of Manila, while operating,
was only on a limited degree of banking operations since the Monetary
Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit
the Overseas Bank of Manila from making new loans and investments in
view of its chronic reserve deficiencies against its deposit liabilities. This
limited operation of respondent Overseas Bank of Manila continued up to
1968.7
Respondent Central Bank also denied that it is guarantor of the
permanent solvency of any banking institution as claimed by petitioner.
It claims that neither the law nor sound banking supervision requires

respondent Central Bank to advertise or represent to the public any
remedial measures it may impose upon chronic delinquent banks as such
action may inevitably result to panic or bank "runs". In the years 1966-
1967, there were no findings to declare the respondent Overseas Bank of
Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was
created in favor of petitioner and his predecessor in interest Concepcion
Maneja when their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time the latter was
not an insolvent bank and its operation as a banking institution was being
salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that
the properties given by respondent Overseas Bank of Manila as additional
collaterals to respondent Central Bank of the Philippines for the former's
overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion
Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank
of the Philippines," a case was filed by the petitioner Ramos, wherein
respondent Overseas Bank of Manila sought to prevent respondent
Central Bank from closing, declaring the former insolvent, and liquidating
its assets. Petitioner Manuel Serrano in this case, filed on September 6,
1968, a motion to intervene in G.R. No. L-29352, on the ground that
Serrano had a real and legal interest as depositor of the Overseas Bank
of Manila in the matter in litigation in that case. Respondent Central Bank
in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to
intervene in that case, on the ground that his claim as depositor of the
Overseas Bank of Manila should properly be ventilated in the Court of First
Instance, and if this Court were to allow Serrano to intervene as depositor
in G.R. No. L-29352, thousands of other depositors would follow and thus
cause an avalanche of cases in this Court. In the resolution dated October
4, 1968, this Court denied Serrano's, motion to intervene. The contents
BANKING | Nature of Funds Deposited | 53
of said motion to intervene are substantially the same as those of the
present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971,
which became final and executory on March 3, 1972, favorable to the
respondent Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that
prohibit the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of said bank) are
hereby annulled and set aside; and said respondent Central Bank of the
Philippines is directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor. Costs
against respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for
judgment in this case, praying for a decision on the merits, adjudging
respondent Central Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring
all assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds
for the benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents,
they in reality are recovery of time deposits plus interest from respondent
Overseas Bank of Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise the acts of the
other respondent Bank and protect the interests of its depositors by virtue
of the constructive trust created when respondent Central Bank required
the other respondent to increase its collaterals for its overdrafts said
emergency loans, said collaterals allegedly acquired through the use of
depositors money. These claims shoud be ventilated in the Court of First
Instance of proper jurisdiction as We already pointed out when this Court
denied petitioner's motion to intervene in G.R. No. L-29352. Claims of
 BANKING | Nature of Funds Deposited | 54

these nature are not proper in actions for mandamus and prohibition as
there is no shown clear abuse of discretion by the Central Bank in its
exercise of supervision over the other respondent Overseas Bank of
Manila, and if there was, petitioner here is not the proper party to raise
that question, but rather the Overseas Bank of Manila, as it did in G.R.
No. L-29352. Neither is there anything to prohibit in this case, since the
questioned acts of the respondent Central Bank (the acts of dissolving
and liquidating the Overseas Bank of Manila), which petitioner here
intends to use as his basis for claims of damages against respondent
Central Bank, had been accomplished a long time ago.

Furthermore, both parties overlooked one fundamental principle in the

nature of bank deposits when the petitioner claimed that there should be
created a constructive trust in his favor when the respondent Overseas
Bank of Manila increased its collaterals in favor of respondent Central
Bank for the former's overdrafts and emergency loans, since these
collaterals were acquired by the use of depositors' money.

Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by
the law on loans. 14 Current and savings deposit are loans to a bank
because it can use the same. The petitioner here in making time deposits
that earn interests with respondent Overseas Bank of Manila was in reality
a creditor of the respondent Bank and not a depositor. The respondent
Bank was in turn a debtor of petitioner. Failure of he respondent Bank to
honor the time deposit is failure to pay s obligation as a debtor and not a
breach of trust arising from depositary's failure to return the subject
matter of the deposit

WHEREFORE, the petition is dismissed for lack of merit, with costs against
petitioner.

SO ORDERED.

ESTAFA
G.R. No. 191015 August 6, 2014
PEOPLE OF THE PHILIPPINES Petitioner,
vs.
JOSE C. GO, AIDA C. DELA ROSA, and FELECITAS D.
NECOMEDES,** Respondents.
DEL CASTILLO, J.:
The power of courts to grant demurrer in criminal cases should be
exercised with great caution, because not only the rights of the accused
- but those of the offended party and the public interest as well - are
involved. Once granted, the accused is acquitted and the offended party
may be left with no recourse. Thus, in the resolution of demurrers, judges
must act with utmost circumspection and must engage in intelligent
deliberation and reflection, drawing on their experience, the law and
jurisprudence, and delicately evaluating the evidence on hand.
This Petition for Review on Certiorari1 seeks to set aside the September
30, 2009 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No.
101823, entitled "People of the Philippines, Petitioner, versus Hon.
Concepcion Alarcon-Vergara et al., Respondents," as well as its January
22, 2010 Resolution3 denying reconsideration of the assailed judgment.
Factual Antecedents
The following facts appear from the account of the CA:
On October 14, 1998, the Monetary Board of the Bangko Sentral ng
Pilipinas (BSP) issued Resolution No. 1427 ordering the closure of the
Orient Commercial Banking Corporation (OCBC) and placing such bank
under the receivership of the Philippine Deposit Insurance Corporation
(PDIC). PDIC, as the statutory receiver of OCBC, effectively took charge
of OCBC’s assets and liabilities in accordance withits mandate under
Section 30 of Republic Act 7653.
BANKING | Nature of Funds Deposited | 55
xxxx
While all the aforementioned events were transpiring, PDIC began
collecting on OCBC’s past due loans receivable by sending demand letters
to its borrowers for the immediate settlement of their outstanding loans.
Allegedly among these borrowers of OCBC are Timmy’s, Inc. and Asia
Textile Mills, Inc. which appeared to have obtained a loan of [P]10 Million
each. A representative of Timmy’s, Inc. denied being granted any loan by
OCBC and insisted that the signatures on the loan documents were
falsified. A representative of Asia Textile Mills, Inc. denied having applied,
much less being granted, a loan by OCBC.
The PDIC conducted an investigation and allegedly came out with a
finding that the loans purportedly in the names of Timmy’s, Inc. and Asia
Textile Mills, Inc. were released in the form of manager’s checks in the
name of Philippine Recycler’s and Zeta International, Inc. These
manager’s checks were then allegedly deposited to the savings account
of the private respondent Jose C. Go with OCBC and, thereafter, were
automatically transferred to his current account in order to fund personal
checks issued by him earlier.
On September 24, 1999, PDIC filed a complaint 4 for two (2) counts of
Estafa thru Falsification of Commercial Documents in the Office of the City
Prosecutor of the City of Manila against the private respondents in relation
to the purported loans of Timmy’s, Inc.and Asia Textile Mills, Inc. On
November 22, 2000, after finding probable cause, the Office of the City
Prosecutor of the City of Manila filed Informations5 against the private
respondents which were docketed as Criminal Case Nos. 00-187318 and
00-187319 in the RTC in Manila.
Upon being subjected to arraignment by the RTC in Manila, the private
respondents pleaded not guilty to the criminal cases filed against them.
A pretrial was conducted. Thereafter, trial of the cases ensued and the
prosecution presented its evidence. After the presentation of all of the
prosecution’s evidence, the private respondents filed a Motion for Leave
to File Demurrer to Evidence and a Motion for Voluntary Inhibition. The

presiding judge granted the private respondents’ Motion for Voluntary
Inhibition and ordered the case to be re-raffled to another branch. The
case was subsequently re-raffled to the branch of the respondent RTC
judge.6
In an Order dated December 19, 2006, the respondent RTC judge granted
the private respondents’ Motion for Leave to File Demurrer to Evidence.
On January 17, 2007, the private respondents filed their Demurrer to
Evidence7 praying for the dismissal of the criminal cases instituted against
them due to the failure of the prosecution to establish their guilt beyond
reasonable doubt.
On July 2, 2007, an Order8 was promulgated by the respondent RTC judge
finding the private respondents’ Demurrer to Evidence to be meritorious,
dismissing the Criminal Case Nos. 00-187318 and 00-187319 and
acquitting all of the accused in these cases. On July 20, 2007, the private
prosecutor in Criminal Case Nos. 00-187318 and 00-187319 moved for a
reconsideration of the July 2, 2007 Order but the same was denied by the
respondent RTC judge in an Order9 dated October 19, 2007.10
Surprisingly, and considering that hundreds of millions of Orient
Commercial Banking Corporation (OCBC) depositors’ money appear to
have been lost – which must have contributed to the bank’s being placed
under receivership, no motion for reconsideration of the July 2, 2007
Order granting respondents’ demurrer to evidence was filed by the
handling public prosecutor, Manila Prosecutor Marlo B. Campanilla
(Campanilla). Only complainant Philippine Deposit Insurance Corporation
(PDIC) filed a Motion for Reconsideration, and the same lacked
Campanilla’s approval and/or conformé; the copy of the Motion for
Reconsideration filed with the RTC11 does not bear Campanilla’s
approval/conformé; instead,it indicates thathe was merely furnished with
a copy of the motion by registered mail.12 Thus, while the prosecution’s
copy of PDIC’sMotion for Reconsideration13 bore Campanilla’s subsequent
approval and conformity, that which was actually filed by PDIC with the
RTC on July 30, 2007 did not contain the public prosecutor’s written
approval and/or conformity.
BANKING | Nature of Funds Deposited | 56
Ruling of the Court of Appeals
On January 4, 2008, the prosecution, through the Office of the Solicitor
General (OSG), filed anoriginal Petition for Certiorari 14 with the CA
assailing the July 2, 2007 Order of the trial court. Itclaimed that the Order
was issued with grave abuse of discretion amounting to lackor excess of
jurisdiction; that it was issued with partiality; that the prosecution was
deprived of its day in court; and that the trial court disregarded the
evidence presented, which undoubtedly showed that respondents
committed the crime of estafa through falsification ofcommercial
documents.
On September 30, 2009, the CA issued the assailed Decision with the
following decretal portion: WHEREFORE, in view of the foregoing
premises, the petition filed in this case is hereby DENIED and the assailed
Orders of the respondent RTC judge are AFFIRMED and deemed final and
executory. SO ORDERED.15
Notably, in dismissing the Petition, the appellate court held that the
assailed July 2, 2007 Order of the trial court became final since the
prosecution failed to move for the reconsideration thereof, and thus
double jeopardy attached. The CA declared thus –
More important than the fact that double jeopardy already attaches is the
fact that the July 2, 2007 Order of the trial court has already attained
finality. This Order was received by the Office of the City Prosecutor of
Manila on July 3, 2007 and by the Private Prosecutor on July 5, 2007.
While the Private Prosecutor filed a Motion for Reconsideration of the said
Order, the Public Prosecutor did not seek for the reconsideration thereof.
It is the Public Prosecutor who has the authority to file a Motion for
Reconsideration of the said order and the Solicitor General who can file a
petition for certiorari with respect to the criminal aspect of the cases. The
failure of the Public Prosecutor to file a Motion for Reconsideration on or
before July 18, 2007 and the failure of the Solicitor General to file a
Petition for Certiorarion or before September 1, 2007 made the order of
the trial court final.

As pointed out by the respondents, the Supreme Court ruled categorically
on this matter in the case of Mobilia Products, Inc. vs. Umezawa (452
SCRA 736), as follows:
"In a criminal case in which the offended party is the State, the interest
of the private complainant or the offended party is limited to the civil
liabilityarising therefrom. Hence, if a criminal case is dismissed by the
trial court or if there is an acquittal, a reconsideration of the order of
dismissal or acquittal may be undertaken, whenever legally feasible,
insofar as the criminal aspect thereof is concerned and may be made only
by the public prosecutor; or in the case of an appeal, by the State only,
through the OSG. The private complainant or offended party may not
undertake such motion for reconsideration or appeal on the criminal
aspect ofthe case. However, the offended party or private complainant
may file a motion for reconsideration of such dismissal or acquittal or
appeal therefrom but only insofar as the civil aspect thereof is concerned.
In so doing, the private complainant or offended party need not secure
the conformity of the public prosecutor. If the court denies his motion for
reconsideration, the private complainant or offended party may appeal or
file a petition for certiorarior mandamus, if grave abuse amounting to
excess or lack of jurisdiction is shown and the aggrieved party has no
right of appeal or given an adequate remedy in the ordinary course of
law."16
In addition, the CA ruled that the prosecution failed to demonstrate that
the trial court committed grave abuse of discretion in granting the
demurrer, or that it was denied its day in court; that on the contrary, the
prosecution was afforded every opportunity to present its evidence, yet it
failed to prove that respondents committed the crime charged.
The CA further held that the prosecution failed to present a witness who
could testify, based on personal knowledge, that the loan documents were
falsified by the respondents; that the prosecution should not have relied
on "letters and unverified ledgers," and it "should have trailed the money
from the beginning to the end;"17 that while the documentary
evidenceshowed that the signatures in the loan documents were falsified,
BANKING | Nature of Funds Deposited | 57
it has not been shown who falsified them. It added that since only two of
the alleged 13 manager’s checks were being questioned, there arose
reasonable doubt as to whether estafa was committed, as to these two
checks; instead, there is an "inescapable possibility that an honest
mistake was made in the preparation of the two questioned manager’s
checks since these checks were made out to the names of different payees
and not in the names of the alleged applicants of the loans." 18 The
appellate court added –
x x x Finally, the petitioner failed to present evidence on where the money
went after they were deposited to the checking account of the private
respondent Jose C. Go. There is only a vague reference that the money
was used to fund the personal checks earlier issued by x x x Go. The
petitioner should have gone further and identified who were the recipients
of these personal checks and if these personal checks were negotiated
and honored. With all the resources of the public prosecutor’s office, the
petitioner should have done a better job of prosecuting the cases filed
against the private respondents. It isa shame that all the efforts of the
government will go for naught due to the negligence of the public
prosecutors in tying up the chain of evidence in a criminal case.19
As a final point, the CA held that if errors were made inthe appreciation
of evidence, these are mere errors of judgment – and not errors of
jurisdiction – which may no longer be reviewed lest respondents be placed
in double jeopardy.
The OSG moved for reconsideration, but in the assailed January 22, 2010
Resolution, the CA stood its ground. Hence, the instant Petition was
instituted.
Issues
In the Petition, it is alleged that –
THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT
RULED THAT –

(a) NO GRAVE ABUSE OF DISCRETION WAS COMMITTED BY
RESPONDENT RTC JUDGE IN GRANTING THE DEMURRER TO EVIDENCE;
(b) THE ORDER OF ACQUITTAL HAS ALREADY ATTAINED FINALITY WHEN
IT WAS NOT CHALLENGED IN A TIMELY AND APPROPRIATE MANNER; AND
(c) THE LOWER COURT MERELY COMMITTED ERRORS OF JUDGMENT AND
NOT OF JURISDICTION.20
Petitioner’s Arguments
Petitioner argues that the public prosecutor actually filed a Motion for
Reconsideration of the assailed July 2,2007 Order of the trial court
granting respondents’ demurrer – that is, by "joining" the private
prosecutor PDIC in the latter’s July 20, 2007 Motion for Reconsideration.
Nonetheless, it admitted that while it joined PDIC in the latter’s July 20,
2007 Motion for Reconsideration, it had only until July 18, 2007 within
which to seek reconsideration since it received the order on July 3, 2007,
while the private prosecutor received a copy of the Order only on July 5,
2007; it pleads thatthe two-day delay in filing the motion should not
prejudice the interests of the State and the People.
Petitioner assumes further that, since it was belated in its filing of the
required Motion for Reconsideration, it may have been tardy as well in
the filing of the Petition for Certiorariwith the CA, or CA-G.R. SP No.
101823. Still, it begs the Court to excuse its mistake in the nameof public
interest and substantial justice, and in order to maintain stability in the
banking industry given that the case involved embezzlement of large
sums ofdepositors’ money in OCBC.
Petitioner goes on to argue that the CAerred in affirming the trial court’s
finding that demurrer was proper. It claims that it was able to prove the
offense charged, and it has shown that respondents were responsible
therefor.
In its Reply,21 petitioner claims thatthe July 2, 2007 Order of the trial
court granting respondents’ demurrer was null and void to begin with,
BANKING | Nature of Funds Deposited | 58
and thus it could not have attained finality. It adds thatcontrary to
respondents’ submission, the private prosecutor’s Motion for
Reconsideration contained the public prosecutor’s written conformity, and
that while it may be saidthat the public prosecutor’s motion was two days
late, still the trial court took cognizance thereof and passed upon its
merits; by so doing, the trial court thus validatedthe public prosecutor’s
action of adopting the private prosecutor’sMotion for Reconsideration as
his own. This being the case, it should therefore besaid that the
prosecution’s resultant Petition for Certiorariwith the CA on January 4,
2008 was timely filed within the required 60-day period, counted from
November 5, 2007, or the date the public prosecutor received the trial
court’s October 19, 2007 Order denying the Motion for Reconsideration.
Petitioner submits further that a Petition for Certiorariwas the only
available remedy against the assailed Orders of the trial court, since the
granting of a demurrer in criminal cases is tantamount to an acquittal and
is thus immediately final and executory. It adds that the denial of its right
to due process is apparent since the trial court’s grant of respondents’
demurrer was purely capricious and done with evident partiality, despite
the prosecution having adduced proof beyond reasonable doubt that they
committed estafa through falsification of commercial documents.
Petitioner thus prays that the assailed CA dispositions be reversed and
that Criminal Case Nos. 00-187318 and 00-187319 be reinstated for
further proceedings.
Respondents’ Arguments
Praying that the Petition be denied, respondents Jose C. Go (Go), Aida C.
Dela Rosa (Dela Rosa), and Felecitas D. Necomedes (Nicomedes) – the
accused in Criminal Case Nos. 00-187318 and 00-187319 – argue in their
Comment22 that the trial court’s grant of their demurrer to evidence
amounts to an acquittal; any subsequent prosecution for the same
offense would thus violate their constitutional right against double
jeopardy. They add thatsince the public prosecutor failed to timely move
for the reconsideration of the trial court’s July 2, 2007 Order, it could not
have validly filed an original Petition for Certiorariwith the CA. Nor can it
 BANKING | Nature of Funds Deposited | 59

be said that the prosecution and the private prosecutor jointly filed the
latter’s July 20, 2007 Motion for Reconsideration with the trial court
because the public prosecutor’s copy of PDIC’smotion was merely sent
through registered mail. Therefore, if it were true that the public
prosecutor gave his approval or conformity to the motion, he did so only
afterreceiving his copy of the motion through the mail, and not at the
time the private prosecutor actually filed its Motion for Reconsideration
with the trial court.
Proof,23 Schedule of Returned Checks and Other Cash Items (RTCOCI),
etc.
Finally, respondents claim that not all the elementsof the crime of estafa
under Article 315, par. 1(b) of the Revised Penal Code have been
established; specifically, it has not been shown that Goreceived the
alleged loan proceeds, and that a demand was made upon him for the
return thereof.

Next, respondents submit that petitioner was not deprived of its day in Our Ruling
court; the grant of their demurrer to evidence is based on a fair and
The Court grants the Petition.
judicious determination of the facts and evidence bythe trial court, leading
it to conclude that the prosecution failed to meet the quantum of proof
Criminal Case Nos. 00-187318 and 00-187319 for estafa through
required to sustain a finding of guilt on the part of respondents. They
falsification of commercial documents against the respondents are based
argue thatthere is no evidence to show that OCBC released loan proceeds
on the theory that in 1997, fictitious loans in favor of two entities –
to the alleged borrowers, Timmy’s, Inc. and Asia Textile Mills, Inc., and
Timmy’s, Inc. and Asia Textile Mills, Inc. – were approved, after which
that these loan proceeds were then deposited in the account of
two manager’s checks representing the supposed proceeds of these
respondent Go. Since no loans were granted to the two borrowers, then
fictitious loans were issued but made payable to two different entities –
there is nothing for Go to misappropriate. With respect to the two
Philippine Recycler’sInc. and ZetaInternational – without any documents
manager’s checks issued to Philippine Recycler’s Inc. and Zeta
issued by the supposed borrowers Timmy’s, Inc. and Asia Textile Mills,
International, respondents contend that these may not beconsidered to
Inc. assigning the supposedloan proceeds tothe two payees. Thereafter,
be the loan proceeds pertaining to Timmy’s, Inc. and Asia Textile Mills,
these two manager’s checks – together with several others totaling
Inc.’s loan application because these checks were not in the name of the
₱120,819,475.0024 – were encashed, and then deposited in the OCBC
alleged borrowers Timmy’s, Inc.and Asia Textile Mills, Inc. as payees.
Savings Account No. 00810-00108-0 of Go. Then, several automatic
Besides, these two checks were never negotiated with OCBC, either for
transfer deposits were made from Go’s savings account to his OCBC
encashmentor deposit, since they did not bear the respective
Current Account No. 008-00-000015-0 which were then used to fund Go’s
indorsements or signatures and account numbers of the payees; thus,
previously dishonored personal checks.
they could not be considered to havebeen negotiated nor deposited with
Go’s account with OCBC. The testimonial and documentary evidenceof the prosecution indicate that
OCBC, a commercial bank, was ordered closed by the BSP sometime in
Next, respondents argue that the cash deposit slip used to deposit the
October 1998. PDIC was designated as OCBC receiver, and it took over
alleged loan proceeds in Go’s OCBC account is questionable, since under
the bank’s affairs, assets and liabilities, records, and collected the bank’s
banking procedure, a cash deposit slip may not be used to deposit checks.
receivables.
Moreover, it has not been shown who prepared the said cash deposit slip.
Respondents further question the validity and authenticity of the other During efforts to collect OCBC’s pastdue loan receivables, PDIC as
documentary evidence presented, such as the Subsidiary Ledger, Cash receiver sent demand letters to the bank’s debtor-borrowers on record,

including Timmy’s, Inc. and Asia Textile Mills, Inc. which appeared to have
obtained unsecured loans of ₱10 million each, and which apparently
remained unpaid. In response to the demand letters, Timmy’s, Inc. and
Asia Textile Mills, Inc. denied having obtained loans from OCBC. Timmy’s,
Inc., through its designated representative, claimed that while it is true
that it applied for an OCBC loan, it no longer pursued the application after
it was granted a loan by another bank. When the OCBC loan documents
were presented to Timmy’s, Inc.’s officers, it was discovered that the
signatures therein of the corporate officers were forgeries. In their
defense and to clarify matters, Timmy’s, Inc.’s corporate officers executed
affidavits and furnished official documents such as their passports and the
corporation’s Articles of Incorporation containing their
respectivesignatures to show PDIC that their purported signatures in the
OCBC loan documents were forgeries. After its investigation into the
matter, PDIC came to the conclusion that the signatures on the Timmy’s,
Inc. loan documents were indeed falsified.25
On the other hand, in a written reply26 to PDIC’s demand letter, Asia
Textile Mills, Inc. vehemently denied thatit applied for a loan with OCBC.
On this basis, PDIC concluded that the AsiaTextile Mills, Inc.loan was
likewise bogus. Moreover, PDIC discovered other bogus loans in OCBC.
Through the falsified loan documents, the OCBC Loan Committee –
composed of Go, who was likewise OCBCPresident, respondent Dela Rosa
(OCBC Senior Vice President, or SVP, and Chief Operating Officer, or
COO), Arnulfo Aurellano and Richard Hsu – approved a ₱10 million
unsecured loan purportedly in favor of Timmy’s, Inc. After deducting
finance charges, advance interest and taxes, DelaRosa certified a net loan
proceeds amounting to ₱9,985,075.00 covered by Manager’s Check No.
000000334727 dated February 5, 1997.28 The face of the check bears the
notation "Loan proceeds of CL-484," the alpha numeric code ("CL-484")of
which refers to the purported loan of Timmy’s, Inc.29 However, the payee
thereof was not the purported borrower, Timmy’s, Inc., but a certain
"Zeta International". Likewise, on even date, Manager’s Check No.
000000334030 for ₱9,985,075.00 was issued, and on its face is indicated
"Loan proceeds of CL-477", which alpha numeric code ("CL-477") refers
BANKING | Nature of Funds Deposited | 60
to the purported loan of AsiaTextile Mills, Inc.31 Manager’s Check No.
0000003340 was made payable not to Asia Textile Mills, Inc., but to "Phil.
Recyclers Inc."
On the same day that the subject manager’s checks were issued, or on
February 5, 1997, it appears that the two checks – together with other
manager’s checks totaling ₱120,819,475.00– were encashed; on the face
ofthe checks, the word "PAID" was stamped, and at the dorsal portion
thereof there were machine validations showing thatManager’s Check No.
0000003347 was presented at 6:16 p.m., while Manager’s Check No.
0000003340 was presented at 6:18 p.m.32
After presentment and encashment, the amount of ₱120,819,475.00 –
which among others included the ₱9,985,075.00 proceeds of the
purported Timmy’s, Inc. loan and the ₱9,985,075.00 proceeds of the
supposed Asia Textile Mills, Inc. loan – was deposited in Go’s OCBC
Savings Account No. 00810-00108-0 at OCBC Recto Branch, apparently
on instructions of respondent Dela Rosa.33 The deposit is covered by
OCBC Cash Deposit Slip34 dated February 5, 1997, with the corresponding
machine validation thereon indicating that the deposit was made at 6:19
p.m.35 The funds were credited to Go’s savings account.36
It appears that previously, or on February 4, 1997, seven OCBC checks
issued by Go from his personal OCBC Current Account No. 008-00-
000015-0 totaling ₱145,488,274.48 were dishonored for insufficiency of
funds.37 After Manager’s Check Nos. 0000003340 and 0000003347, along
with several other manager’s checks, were encashed and the proceeds
thereof deposited in Go’s OCBC Savings Account No. 00810-00108-0
withautomatic transferfeature to his OCBC Current Account No. 008-00-
000015-0, funds were automatically transferred from the said savings
account to the current account, which atthe time contained only a total
amountof ₱26,332,303.69. Go’sOCBC Current Account No. 008-00-
000015-0 was credited with ₱120,819,475.00, and thereafter the account
registered a balance of ₱147,151,778.69. The seven previously
dishonored personal checks were thenpresented for clearing, and were
subsequently cleared that sameday, or on February 5,

1997.38 Apparently, they were partly funded by the
₱120,819,475.00manager’s check deposits – which include Manager’s
Check Nos. 0000003340 and 0000003347.
During the examination and inquiry into OCBC’s operations, oron January
28, 1998, Go issued and sent a letter39 to the BSP, through Maria Dolores
Yuviengco, Director of the Departmentof Commercial Banks, specifically
requesting that the BSP refrain from sending any communication to
Timmy’s, Inc. and Asia Textile Mills, Inc., among others. He manifested
that he was "willing to assume the viability and full payment"of the
accounts under investigation and examination, including the Timmy’s,
Inc. and AsiaTextile Mills, Inc. accounts.
Demurrer to the evidence40 is "an objection by one of the parties in an
action, to the effect that the evidence which his adversary produced is
insufficient in point of law, whether true or not, to make out a case or
sustain the issue. The party demurring challenges the sufficiencyof the
whole evidence to sustain a verdict. The court, in passing upon the
sufficiency of the evidence raised in a demurrer, is merely required to
ascertain whether there is competent or sufficient evidence to sustain the
indictment or to support a verdict of guilt. x x x Sufficient evidence for
purposes of frustrating a demurrer thereto is such evidence in character,
weight or amount as will legally justify the judicial or official action
demanded according to the circumstances. To be considered sufficient
therefore, the evidence must prove: (a) the commission of the crime, and
(b) the precise degree of participation therein by the accused."41 Thus,
when the accused files a demurrer, the court must evaluate whether the
prosecution evidence is sufficient enough to warrant the conviction of the
accused beyond reasonable doubt.42
"The grant or denial of a demurrer to evidence is left to the sound
discretion of the trial court, and its ruling on the matter shall not be
disturbed in the absence of a grave abuse of such discretion."43 As to
effect, "the grant of a demurrer to evidence amounts to an acquittal and
cannot be appealed because it would place the accused in double
jeopardy. The order is reviewable only by certiorariif it was issued with
BANKING | Nature of Funds Deposited | 61
grave abuse of discretion amounting tolack or excess of
jurisdiction."44 When grave abuse of discretion is present, an order
granting a demurrer becomes null and void.
As a general rule, an order granting the accused’s demurrer to evidence
amounts to an acquittal. There are certain exceptions, however, as when
the grant thereof would not violate the constitutional proscription on
double jeopardy. For instance, this Court ruled that when there is a finding
that there was grave abuse of discretion on the part of the trial court in
dismissing a criminal case by granting the accused’s demurrer to
evidence,its judgment is considered void, as this Court ruled in People v.
Laguio, Jr.:
By this time, it is settled that the appellate court may review dismissal
orders of trial courts granting an accused’s demurrer to evidence. This
may be done via the special civil action of certiorariunder Rule 65 based
on the ground of grave abuse of discretion, amounting to lack or excess
of jurisdiction. Such dismissal order, being considered void judgment,
does not result in jeopardy. Thus, when the order of dismissal is annulled
or set aside by an appellate court in an original special civil action via
certiorari, the right of the accused against double jeopardy is not violated.
In the instant case, having affirmed the CA finding grave abuse of
discretion on the part of the trial court when it granted the accused’s
demurrer to evidence, we deem its consequent order of acquittal void.45
Grave abuse of discretion is defined as "that capricious or whimsical
exercise of judgment which is tantamount to lack of jurisdiction. ‘The
abuse of discretion must be patent and gross as to amount to an evasion
of a positive duty or a virtual refusal to perform a duty enjoined by law,
or to act at all in contemplation of law, as where the power is exercised
in an arbitrary and despotic manner by reason of passion and hostility.’
The party questioning the acquittal of an accused should be able toclearly
establish that the trial court blatantly abused its discretion such that it
was deprived of its authority to dispense justice."46

In the exercise of the Court’s "superintending control over inferior courts,
we are to be guided by all the circumstances of each particular case ‘as
the ends of justice may require.’ So it is that the writ will be granted
where necessary to prevent a substantial wrong or to do substantial
justice."47
Guided by the foregoing pronouncements, the Court declaresthat the CA
grossly erred in affirming the trial court’s July 2, 2007 Order granting the
respondent’s demurrer, which Order was patently null and void for having
been issued with grave abuse of discretion and manifest irregularity, thus
causing substantial injury to the banking industry and public
interest.1avvphi1 The Court finds that the prosecution has presented
competent evidence to sustain the indictment for the crime of estafa
through falsification of commercial documents, and that respondents
appear to be the perpetrators thereof. In evaluating the evidence, the
trial court effectively failed and/or refused to weigh the prosecution’s
evidence against the respondents, which it was duty-bound to do as a
trier of facts; considering that the case involved hundreds of millions of
pesos of OCBC depositors’ money – not to mention that the banking
industry is impressed with public interest, the trial court should have
conducted itself with circumspection and engaged in intelligent reflection
in resolving the issues.
The elements of estafa through abuse ofconfidence under Article 315, par.
1(b) of the Revised Penal Code48 are: "(a) that money,goods or other
personal property is received by the offender in trust oron commission,
or for administration, or under any other obligation involving the duty to
make delivery of or to return the same; (b) that there be misappropriation
orconversion of such money or property by the offender, or denial on his
part of such receipt; (c) that such misappropriation or conversion or
denial is to the prejudice of another; and (d) there is demand by the
offended party to the offender."49
Obviously, a bank takes its depositors’ money as a loan, under an
obligation to return the same; thus, the term "demand deposit."
BANKING | Nature of Funds Deposited | 62
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simpleloan. Article 1980 of the Civil Code
expressly provides that "x x x savingsx 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. x x x50
Moreover, the banking laws impose high standards on banks in view of
the fiduciary nature of banking."This fiduciary relationship means that the
bank’s obligation to observe ‘high standards ofintegrity 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."51
In Soriano v. People,52 it was held that the President of a bank is a
fiduciary with respect to the bank’s funds, and he holds the same in trust
or for administration for the bank’s benefit. From this, it may beinferred
that when such bank president makes it appear through falsification that
an individual or entity applied for a loan when in fact such individual or
entity did not, and the bank president obtains the loan proceeds and
converts the same, estafa is committed.
Next, regarding misappropriation, the evidence tends to extablish that
Manager’s Check Nos.0000003340 and 0000003347 were encashed,
using the bank’s funds which clearly belonged to OCBC’s depositors, and
then deposited in Go’s OCBC Savings Account No. 00810-00108-0 at
OCBC Recto Branch – although he was not the named payee therein.
Next, the money was automatically transferred to Go’s OCBC Current
Account No. 008-00-000015-0 and used to fund his seven previously-
issued personal checks totaling ₱145,488,274.48, which checks were
dishonored the day before. Simply put, the evidence strongly indicates
that Go converted OCBC funds to his own personal use and benefit. "The
words ‘convert’ and ‘misappropriate’ connote an act of using or disposing
of another’s property as if it were one’s own, or of devoting it to a purpose

or use different from that agreed upon. To misappropriate for one’s own
use includes not only conversion to one’s personal advantage, but also
every attempt to dispose of the property of another without right. x x x
In proving the element of conversion or misappropriation, a legal
presumption of misappropriation arises when the accused fails to deliver
the proceeds of the sale or to return the items to be sold and fails to give
an account of their whereabouts.Thus, the merepresumption of
misappropriation or conversion is enough to conclude thata probable
cause exists for the indictment x x x."53
As to the third element of estafa, there is no question that as a
consequence of the misappropriation of OCBC’s funds, the bank and its
depositors have been prejudiced; the bank has been placed under
receivership, and the depositors’ money is no longer under their
unimpeded disposal.
Finally, on the matter of demand, while it has not been shown that the
bank demanded the return of the funds, it has nevertheless been held
that "[d]emand is not an element of the felony or a condition precedent
tothe filing of a criminal complaint for estafa. Indeed, the accusedmay be
convicted ofthe felony under Article 315, paragraph 1(b) of the Revised
Penal Code if the prosecution proved misappropriation or conversion by
the accused of the money or property subject of the Information. In a
prosecution for estafa, demand is not necessary where there is evidence
of misappropriation or conversion."54 Thus, strictly speaking, demand is
not an element of the offense of estafa through abuse of confidence; even
a verbal query satisfies the requirement.55 Indeed, in several past rulings
of the Court, demand was not even included as anelement of the crime
of estafa through abuse of confidence, orunder paragraph 1(b).56
On the other hand, the elements of the crime of falsification of commercial
document under Art. 17257 are: "(1) that the offender is a private
individual; (2) that the offender committed any of the acts of falsification;
and (3) that the act of falsification is committed ina commercial
document."58 As to estafa through falsification of public, official or
commercial documents, it has been held that –
BANKING | Nature of Funds Deposited | 63
The falsification of a public, official, or commercial document may be a
means of committing Estafa, because before the falsified document is
actually utilized to defraud another, the crime of Falsification has already
been consummated, damage or intent to cause damage not being an
element of the crime of falsification of public, official or commercial
document. In other words, the crime of falsification has already existed.
Actually utilizing that falsified public, official or commercial document
todefraud another is estafa. But the damage is caused by the commission
of Estafa, not by the falsification of the document. Therefore, the
falsification of the public, official or commercial document is only a
necessary means to commit the estafa.59
Simulating OCBC loan documents – such as loan applications, credit
approval memorandums, and the resultant promissory notes and other
credit documents – by causing it to appear that persons have participated
in any act or proceeding when they did not in fact so participate, and by
counterfeiting or imitating their handwriting or signatures constitute
falsification of commercial and public documents.
As to the respondents’ respective participation in the commission of the
crime, suffice it to state that as the beneficiary of the proceeds, Go is
presumed to be the author of the falsification. The fact that previously,
his personal checks totaling ₱145,488,274.48 were dishonored, and the
day after, the amount of ₱120,819,475.00 was immediately credited to
his account, which included funds from the encashment of Manager’s
Check Nos. 0000003340 and 0000003347 or the loan proceeds of the
supposed Timmy’s, Inc. and Asia Textile Mills, Inc. accounts, bolsters this
view. "[W]henever someone has in his possession falsified documents
[which he used to] his advantage and benefit, the presumption that he
authored it arises."60
x x x This is especially true if the use or uttering of the forged documents
was so closely connected in time with the forgery that the user or
possessor may be proven to have the capacity of committing the forgery,
or to have close connection with the forgers, and therefore, had complicity
in the forgery.

In the absence of a satisfactory explanation, one who is found in
possession of a forged document and who used or uttered it is presumed
to be the forger.
Certainly, the channeling of the subjectpayments via false remittances to
his savings account, his subsequent withdrawals of said amount as well
as his unexplained flight at the height of the bank’s inquiry into the matter
more than sufficiently establish x x x involvement in the falsification.61
Likewise, Dela Rosa’s involvement inthe scheme has been satisfactorily
shown. As OCBC SVP and COO and member of the OCBC Loan Committee,
she approved the purported Timmy’s, Inc.loan, and she certified and
signed the February 2, 1997 OCBC Disclosure Statement and other
documents.62 She likewise gave specific instructions to deposit the
proceeds of Manager’s Check Nos. 0000003340 and 0000003347, among
others, in Go’s OCBC Savings Account No. 00810-00108-0 at OCBC Recto
Branch.63 Finally, she was a signatory to the two checks.64
On the other hand, respondent Nicomedes as OCBC Senior Manager for
Corporate Accounts – Account Management Group, among others
prepared the Credit Approval Memorandum and recommended the
approval of the loans.65
In granting the demurrer, the trial court – in its assailed July 2, 2007
Order – concluded that based on the evidence adduced, the respondents
could not have falsified the loan documents pertaining toTimmy’s, Inc.
and Asia Textile Mills, Inc. since the individuals who assert that their
handwriting and signatures were forged were not presented incourt to
testify on such claim; that the prosecution witnesses – Honorio E. Franco,
Jr. (Franco) of PDIC, the designated Assisting Deputy Liquidator of OCBC,
and Virginia Rowella Famirin (Famirin), Cashier of OCBC Recto Branch –
were not present when the loan documents were executed and signed,
and thus have no personal knowledge of the circumstances surrounding
the alleged falsification; and as high-ranking officers of OCBC,
respondents could not be expected to have prepared the saiddocuments.
The evidence, however, suggests otherwise; it shows that respondents
BANKING | Nature of Funds Deposited | 64
had a direct hand in the falsification and creation of fictitious loans. The
loan documents were even signed by them. By disregarding what is
evident in the record, the trial court committed substantial wrong that
frustrates the ends of justice and adversely affects the public interest.
The trial court’s act was so patent and gross as to amount to an evasion
of positive duty or to a virtual refusal to perform a duty enjoined by law.
An act of a court or tribunal may only be considered as committed in
grave abuse of discretion when the same was performed in a capricious
or whimsical exercise of judgment which is equivalent to lack of
jurisdiction. The abuse of discretion must be so patent and gross as to
amount to an evasion of positive duty or to a virtual refusal to perform a
duty enjoined by law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic manner by reason of
passion and personal hostility. x x x66
On the charge of estafa, the trial court declared that since the payees of
Manager’s Check Nos. 0000003340 and 0000003347 were not Asia
Textile Mills, Inc. and Timmy’s, Inc., respectively, but other entities– Phil.
Recyclers Inc. and Zeta International, and there are no documents drawn
by the borrowers assigning the loan proceeds to these two entities, then
it cannot besaid that there were loan proceeds released to these
borrowers. The trial court added that it is doubtful that the two manager’s
checks were presented and negotiated for deposit in Go’s savings
account, since theydo not contain the required indorsements of the
borrowers, the signatures of the tellers and individuals/payees who
received the checks and the proceeds thereof, and the respective account
numbers of the respondents; and the checks were presented beyond
banking hours. The trial court likewise held that the fact that a cash
deposit slip – and not a check deposit slip – was used to allegedly deposit
the checks raised doubts as to the truth of the allegation that the
manager’s checks were deposited and credited to Go’s savings account.
The CA echoed the trial court’s observations, adding that the evidence
consisted of mere "letters and unverified ledgers" which were thus
insufficient; that there was an "inescapable possibility that an honest

mistake was made" in the preparation and issuance of Manager’s
CheckNos. 0000003340 and 0000003347, since these two checks are
claimed to be just a few of several checks – numbering thirteen in all –
the rest of which werenever questioned by the receiver PDIC. The
appellate court added that the prosecution should have presented further
evidence as to where the money went after being deposited inGo’s
savings and current accounts, identifying thus the recipients of
Go’spersonal checks.
What the trial and appellate courts disregarded, however, is that the
OCBC funds ended up in the personal bank accountsof respondent Go,
and were used to fund his personal checks, even as he was not entitled
thereto. These, if not rebutted, are indicative ofestafa, as may be seen
from the afore-cited Sorianocase.
The bank money (amounting to ₱8million) which came to the possession
of petitioner was money held in trust or administration by him for the
bank, in his fiduciary capacity as the President of said bank. It is not
accurate to say that petitioner became the owner of the ₱8 million
because it was the proceeds of a loan. That would have been correct if
the bank knowingly extended the loan to petitioner himself. But that is
not the case here. According to the information for estafa, the loan was
supposed to be for another person, a certain "Enrico Carlos"; petitioner,
through falsification, made it appear that said "Enrico Carlos" applied for
the loan when infact he ("Enrico Carlos") 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 ₱8 million. Thus, petitioner remained the bank’s
fiduciary with respect to that money, which makes it capable of
misappropriation or conversion in his hands.67
Thus, it is irrelevant that the proceeds of the supposed loans were made
payable to entities other than the alleged borrowers.1âwphi1 Besides, the
manager’s checks themselves indicate that they were the proceeds of the
purported Timmy’s, Inc.’s and Asia Textile Mills, Inc.’s loans, through the
alpha numeric codes specifically assigned to them that are printed on the
BANKING | Nature of Funds Deposited | 65
face of the checks; the connection between the checks and the purported
loans is thus established. In the same vein, the CA’s supposition that
there is an "inescapable possibility that an honest mistake was made inthe
preparation of the two questioned manager’s checks" is absurd; even so,
the bottom line is that they were encashed using bank funds, and the
proceeds thereof were deposited in Go’s bank savings and current
accounts and used to fund his personal checks.
Furthermore, as correctly pointed outby petitioner, it issuperfluous to
require that the recipients of Go’s personal checks be identified. For
purposes of proving the crime, it has been shown that Goconverted bank
funds to his own personal use when they were deposited in his accounts
and his personal checks were cleared and the funds were debited from
his account.1âwphi1 This suffices. Likewise, the Court agrees that the
prosecution’s reliance on the supposed loan documents, subsidiary
ledgers, deposit slip, cash proof, RTCOCI and other documents was
proper. They are both public and private documents which may be
received in evidence; notably, petitioner’s documentary evidence was
admitted in full by the trial court.68 With respect to evidence consisting of
private documents, the presumption remains that "therecording of private
transactions has been fair and regular, and that the ordinary course of
business has been followed."69
Go’s January 28, 1998 letter to the BSP stating that he was "willing to
assume the viabilityand full payment" of the accounts under examination
– which included the Timmy’s, Inc. and Asia Textile Mills, Inc. accounts,
among others – is an offer of compromise, and thus an implied admission
of guilt under Rule 130, Section 27 of the Revised Rules on Evidence.70
In addition, appellant’s act of pleading for his sister-in-law’s forgiveness
may be considered as analogous to an attempt to compromise, which in
turn can be received as an implied admission ofguilt under Section 27,
Rule 130 x x x.71
As a result of the Court’s declaration of nullity of the assailed Orders of
the trial court, any dissection of the truly questionable actions of
 BANKING | Nature of Funds Deposited | 66

Prosecutor Campanilla – which should merit appropriate disciplinary and circumspect in the performance of their duties as members of the
action for they reveal a patent ignorance of procedure, if not indolence or Bench xx x."74
a deliberate intention to bungle his own case – becomes unnecessary. It
is conceded that the lack of Campanilla’s approval and/or conforméto WHEREFORE, the Petition is GRANTED. The September 30, 2009 Decision
PDIC’s Motion for Reconsideration should have rendered the trial court’s and January 22, 2010 Resolution of the Court of Appeals are REVERSED
assailed Ordersfinal and executory were it not for the fact that they were and SET ASIDE. The July 2, 2007 and October 19, 2007 Orders of the
inherently null and void; Campanilla’s irresponsible actions almost cost Regional Trial Court of Manila, Branch 49 in Criminal Case Nos. 00-187318
the People its day in court and their right to exact justice and retribution, and 00-187319 are declared null and void, and the said cases are ordered
not to mention that they could have caused immeasurable damage to the REINSTATED for the continuation of proceedings.
banking industry. Just the same, "[a] void judgment or order has no legal
SO ORDERED.
and binding effect, force or efficacy for any purpose. In contemplation of
law, it is non-existent. Such judgment or order may be resisted in any
action or proceeding whenever it is involved. It is not even necessary to
take any steps to vacate or avoid a void judgment or final order; it may
simply be ignored."72 More appropriately, the following must be cited:

x x x Clearly, the assailed Order of Judge Santiago was issued in grave

abuse of discretion amounting to lack of jurisdiction. A void order is no
order at all. It cannot confer any right or be the source of any relief. This
Court is not merely a court of law; it is likewise a court of justice.

To rule otherwise would leave the private respondent without any

recourse to rectify the public injustice brought about by the trial court's
Order, leaving her with only the standing to file administrative charges
for ignorance of the law against the judge and the prosecutor. A party
cannot be left without recourse to address a substantive issue in law.73

Finally, it must be borne in mind that "[t]he granting of a demurrer to

evidence should x x x be exercised with caution, taking into consideration
not only the rights of the accused, but also the right of the private
offended party to be vindicated of the wrongdoing done against him, for
if it is granted, the accused is acquitted and the private complainant is
generally left with no more remedy. In such instances, although the
decision of the court may be wrong, the accused can invoke his right
against double jeopardy. Thus, judges are reminded to be more diligent
 BANKING | Nature of Funds Deposited | 67

QUALIFIED THEFT and helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
G.R. Nos. 173654-765 August 28, 2008 Pototan, Iloilo, without the knowledge and/or consent of the management
of the Bank and with intent of gain, did then and there willfully, unlawfully
PEOPLE OF THE PHILIPPINES, petitioner,
and feloniously take, steal and carry away the sum of FIFTEEN THOUSAND
vs.
PESOS (P15,000.00), Philippine Currency, to the damage and prejudice
TERESITA PUIG and ROMEO PORRAS, respondents.
of the said bank in the aforesaid amount.
CHICO-NAZARIO, J.:
After perusing the Informations in these cases, the trial court did not find
the existence of probable cause that would have necessitated the
This is a Petition for Review under Rule 45 of the Revised Rules of Court
issuance of a warrant of arrest based on the following grounds:
with petitioner People of the Philippines, represented by the Office of the
Solicitor General, praying for the reversal of the Orders dated 30 January
(1) the element of ‘taking without the consent of the owners’ was
2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial
missing on the ground that it is the depositors-clients, and not the Bank,
Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of
which filed the complaint in these cases, who are the owners of the money
Qualified Theft filed against respondents Teresita Puig and Romeo Porras,
allegedly taken by respondents and hence, are the real parties-in-
and denying petitioner’s Motion for Reconsideration, in Criminal Cases No.
interest; and
05-3054 to 05-3165.
(2) the Informations are bereft of the phrase alleging "dependence,
The following are the factual antecedents:
guardianship or vigilance between the respondents and the
offended party that would have created a high degree of
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before
confidence between them which the respondents could have
Branch 68 of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft
abused."
against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who
were the Cashier and Bookkeeper, respectively, of private complainant
It added that allowing the 112 cases for Qualified Theft filed against the
Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases
respondents to push through would be violative of the right of the
No. 05-3054 to 05-3165.
respondents under Section 14(2), Article III of the 1987 Constitution
which states that in all criminal prosecutions, the accused shall enjoy the
The allegations in the Informations1 filed before the RTC were uniform
right to be informed of the nature and cause of the accusation against
and pro-forma, except for the amounts, date and time of commission, to
him. Following Section 6, Rule 112 of the Revised Rules of Criminal
wit:
Procedure, the RTC dismissed the cases on 30 January 2006 and refused
INFORMATION to issue a warrant of arrest against Puig and Porras.

That on or about the 1st day of August, 2002, in the Municipality of A Motion for Reconsideration2 was filed on 17 April 2006, by the
Pototan, Province of Iloilo, Philippines, and within the jurisdiction of this petitioner.
Honorable Court, above-named [respondents], conspiring, confederating,

On 9 June 2006, an Order3 denying petitioner’s Motion for
Reconsideration was issued by the RTC, finding as follows:
Accordingly, the prosecution’s Motion for Reconsideration should be, as it
hereby, DENIED. The Order dated January 30, 2006 STANDS in all
respects.
Petitioner went directly to this Court via Petition for Review
on Certiorari under Rule 45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE
CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF
GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside
the Orders dated 30 January 2006 and 9 June 2006 issued by the trial
court, and that it be directed to proceed with Criminal Cases No. 05-3054
to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed,
savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loans." Corollary
thereto, Article 1953 of the same Code provides that "a person who
receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality." Thus, it posits that the depositors who
place their money with the bank are considered creditors of the bank. The
bank acquires ownership of the money deposited by its clients, making
the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the
elements of the crime of qualified theft, citing that a perusal of the
Informations will show that they specifically allege that the respondents
were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money with grave
BANKING | Nature of Funds Deposited | 68
abuse of confidence, and without the knowledge and consent of the bank,
to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the
petition on the ground that a Petition for Review on Certiorari via Rule 45
is the wrong mode of appeal because a finding of probable cause for the
issuance of a warrant of arrest presupposes evaluation of facts and
circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through
the Secretary of Justice, is the principal party to file a Petition for Review
on Certiorari, considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to
insufficiency of the Informations and, therefore, because of this defect,
there is no basis for the existence of probable cause which will justify the
issuance of the warrant of arrest. Petitioner assails the dismissal
contending that the Informations for Qualified Theft sufficiently state facts
which constitute (a) the qualifying circumstance of grave abuse of
confidence; and (b) the element of taking, with intent to gain and without
the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of
arrest, the RTC judge found the allegations in the Information inadequate.
He ruled that the Information failed to state facts constituting the
qualifying circumstance of grave abuse of confidence and the element
of taking without the consent of the owner, since the owner of the money
is not the Bank, but the depositors therein. He also cites People v. Koc
Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by
reason of dependence, guardianship or vigilance, between the
respondents and the offended party that has created a high degree of
confidence between them, which the respondents abused.

At this point, it needs stressing that the RTC Judge based his conclusion
that there was no probable cause simply on the insufficiency of the
allegations in the Informations concerning the facts constitutive of the
elements of the offense charged. This, therefore, makes the issue of
sufficiency of the allegations in the Informations the focal point of
discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised
Penal Code, is committed as follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the
penalties next higher by two degrees than those respectively specified in
the next preceding article, if committed by a domestic servant, or with
grave abuse of confidence, or if the property stolen is motor vehicle, mail
matter or large cattle or consists of coconuts taken from the premises of
a plantation, fish taken from a fishpond or fishery or if property is taken
on the occasion of fire, earthquake, typhoon, volcanic eruption, or any
other calamity, vehicular accident or civil disturbance. (Emphasis
supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the
physical taking of another’s property without violence or intimidation
against persons or force upon things. The elements of the crime under
this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon
things.
To fall under the crime of Qualified Theft, the following elements must
concur:
BANKING | Nature of Funds Deposited | 69
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation
against persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of
Court requires, inter alia, that the information must state the acts or
omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule
110 of the Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of
as constituting the offense and the qualifying and aggravating
circumstances must be stated in ordinary and concise language and not
necessarily in the language used in the statute but in terms sufficient to
enable a person of common understanding to know what offense is being
charged as well as its qualifying and aggravating circumstances and for
the court to pronounce judgment.
It is evident that the Information need not use the exact language of the
statute in alleging the acts or omissions complained of as constituting the
offense. The test is whether it enables a person of common understanding
to know the charge against him, and the court to render judgment
properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one
another, with grave abuse of confidence, being the Cashier and

Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other
employees of a Bank who come into possession of the monies deposited
therein enjoy the confidence reposed in them by their employer. Banks,
on the other hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express provisions of
the law, but from established jurisprudence. The relationship between
banks and depositors has been held to be that of creditor and debtor.
Articles 1953 and 1980 of the New Civil Code, as appropriately pointed
out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly
established the nature of possession by the Bank of the money deposits
therein, and the duties being performed by its employees who have
custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such
employees acted with grave abuse of confidence, to the damage and
prejudice of the Bank, without particularly referring to it as owner of the
money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the accused teller
was convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the
jurisdiction of his Honorable Court, the above-named accused ASUNCION
GALANG ROQUE, being then employed as teller of the Basa Air Base
Savings and Loan Association Inc. (BABSLA) with office address at Basa
Air Base, Floridablanca, Pampanga, and as such was authorized and
BANKING | Nature of Funds Deposited | 70
reposed with the responsibility to receive and collect capital contributions
from its member/contributors of said corporation, and having collected
and received in her capacity as teller of the BABSLA the sum of TEN
THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with
grave abuse of confidence and without the knowledge and
consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00,
Philippine currency, by making it appear that a certain depositor by the
name of Antonio Salazar withdrew from his Savings Account No. 1359,
when in truth and in fact said Antonio Salazar did not withdr[a]w the said
amount of P10,000.00 to the damage and prejudice of BABSLA in the total
amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places
money in the teller’s possession due to the confidence reposed on the
teller, the felony of qualified theft would be committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of
the crime of Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24,
1992 and February 13, 1992, both dates inclusive, in the City of Manila,
Philippines, the said accused did then and there wilfully, unlawfully and
feloniously, with intent of gain and without the knowledge and consent of
the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations
belonging to the PHILIPPINE COMMERCIAL INTERNATIONAL BANK
(PCIBank for brevity), Luneta Branch, Manila represented by its Branch
Manager, HELEN U. FARGAS, to the damage and prejudice of the said
owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with
grave abuse of confidence and unfaithfulness, he being the Branch

Operation Officer of the said complainant and as such he had free access
to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could
not have committed the crime had he not been holding the position of
Luneta Branch Operation Officer which gave him not only sole access to
the bank vault xxx. The management of the PCIB reposed its trust and
confidence in the appellant as its Luneta Branch Operation Officer, and it
was this trust and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison,
described the nature of possession by the Bank. The money in this case
was in the possession of the defendant as receiving teller of the bank,
and the possession of the defendant was the possession of the Bank. The
Court held therein that when the defendant, with grave abuse of
confidence, removed the money and appropriated it to his own use
without the consent of the Bank, there was taking as contemplated in the
crime of Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the Informations
merely alleged the positions of the respondents; that the crime was
committed with grave abuse of confidence, with intent to gain and without
the knowledge and consent of the Bank, without necessarily stating the
phrase being assiduously insisted upon by respondents, "of a relation
by reason of dependence, guardianship or vigilance, between the
respondents and the offended party that has created a high
degree of confidence between them, which respondents
abused,"12 and without employing the word "owner" in lieu of the "Bank"
were considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and
Bookkeeper of the Bank in this case, there is even no reason to quibble
on the allegation in the Informations that they acted with grave abuse of
BANKING | Nature of Funds Deposited | 71
confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the
requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its
clients; and the employees of the Bank, who are entrusted with the
possession of money of the Bank due to the confidence reposed in them,
occupy positions of confidence. The Informations, therefore, sufficiently
allege all the essential elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may
file the instant petition, the ruling in Mobilia Products, Inc. v. Hajime
Umezawa13 is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of
the private complainant or the offended party is limited to the civil liability
arising therefrom. Hence, if a criminal case is dismissed by the trial court
or if there is an acquittal, a reconsideration of the order of dismissal or
acquittal may be undertaken, whenever legally feasible, insofar as the
criminal aspect thereof is concerned and may be made only by the public
prosecutor; or in the case of an appeal, by the State only, through the
OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that
the rule is well-settled that in appeals by certiorari under Rule 45 of the
Rules of Court, only errors of law may be raised,14 and herein petitioner
certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in
these cases, a closer look at the records of the preliminary investigation
conducted will show that, indeed, probable cause exists for the indictment
of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of
Court, the judge shall issue a warrant of arrest only upon a finding of
probable cause after personally evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v. Makasiar,15 as
reiterated in Allado v. Driokno,16 explained that probable cause for the
issuance of a warrant of arrest is the existence of such facts and
 BANKING | Nature of Funds Deposited | 72

circumstances that would lead a reasonably discreet and prudent person

to believe that an offense has been committed by the person sought to
be arrested.17 The records reasonably indicate that the respondents may
have, indeed, committed the offense charged.

Before closing, let it be stated that while it is truly imperative upon the
fiscal or the judge, as the case may be, to relieve the respondents from
the pain of going through a trial once it is ascertained that no probable
cause exists to form a sufficient belief as to the guilt of the respondents,
conversely, it is also equally imperative upon the judge to proceed with
the case upon a showing that there is a prima facie case against the
respondents.

WHEREFORE, premises considered, the Petition for Review on Certiorari is

hereby GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of
the RTC dismissing Criminal Cases No. 05-3054 to 05-
3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of
Arrest issue against herein respondents TERESITA PUIG and ROMEO
PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to
proceed with the trial of Criminal Cases No. 05-3054 to 05-3165,
inclusive, with reasonable dispatch. No pronouncement as to costs.

SO ORDERED.

QUALIFIED THEFT
G.R. No. 138954 November 25, 2004
ASUNCION GALANG ROQUE, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, respondent.
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, assailing the decision of the Court of Appeals in CA–
G.R. CR No. 20411, entitled "People of the Philippines vs. Asuncion Galang
Roque," which affirmed in toto the decision of the Regional Trial Court
(RTC) of Guagua, Pampanga, Branch 49, where petitioner was found
guilty of the crime of qualified theft.
In an information dated December 3, 1990, the petitioner was charged
with qualified theft in the Regional Trial Court of Guagua Pampanga,
Branch 49. The Information reads as follows:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the
jurisdiction of his Honorable Court, the above-named accused ASUNCION
GALANG ROQUE, being then employed as teller of the Basa Air Base
Savings and Loan Association Inc. (BABSLA) with office address at Basa
Air Base, Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital contributions
from its member/contributors of said corporation, and having collected
and received in her capacity as teller of the BABSLA the sum of TEN
THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with
grave abuse of confidence and without the knowledge and consent of said
corporation, did then and there willfully, unlawfully and feloniously take,
steal and carry away the amount of P10,000.00, Philippine currency, by
making it appear that a certain depositor by the name of Antonio Salazar
withdrew from his Savings Account No. 1359, when in truth and in fact
said Antonio Salazar did not withdr[a]w the said amount of P10,000.00
BANKING | Nature of Funds Deposited | 73
to the damage and prejudice of BABSLA in the total amount of
P10,000.00, Philippine currency.
All contrary to law.1
The evidence of the prosecution consisted of the testimonies of three
witnesses, namely: Antonio Salazar, Rosalina de Lazo and Reynaldo
Manlulu and Exhibits A to G with submarkings.
The first prosecution witness, Antonio Salazar (Salazar) is a
member/depositor of the Basa Air Base Savings and Loan Association Inc.
(BABSLA) as evidenced by his passbook No. 1359. He was made to sign
two ledgers when he opened his savings account. On November 16, 1989,
Salazar made a deposit of P2,000 at the BABSLA; however, he did not
make any withdrawal, nor did he authorize anyone to do the same on that
date or on November 17, 1989 or for the whole month of November of
that year. Salazar disclosed that around July 1990 he heard that the funds
of other depositors were missing inside the BABSLA and were supposedly
clandestinely circulating around the base. Prodded by this news, and
considering that the balance in his passbook was P46,000, he went to the
BABSLA to withdraw P40,000, but was informed that his balance at the
BABSLA was insufficient to cover the withdrawal. He was not allowed to
withdraw. Rosalina de Lazo, the general manager, informed him that
several withdrawals were made on his account amounting to P30,500, as
evidenced by three (3) withdrawal slips. Included among these
withdrawal slips is one with the amount of P10,000, dated November 16,
1989. Salazar claimed that the signature appearing on said withdrawal
slip was not his signature. He does not personally know who made the
withdrawal of P10,000. Salazar assumed that the one in control of the
funds made the withdrawal.2
The second prosecution witness was the general manager of the BABSLA
in the person of Rosalina de Lazo (de Lazo). She has held her position as
general manager since 1983. De Lazo averred that the BABSLA had only
one teller, and that the petitioner, Asuncion Galang Roque, held that job
from 1989 up to the last working day of June 1990. She added that the
petitioner had not been absent from work, particularly in 1989. Sometime

in July 1990, she met MSgt. Antonio Salazar, who was complaining that
the amount of P30,500 was missing from his account. A comparison of
the bank's ledger and his passbook manifested that there were three (3)
withdrawals appearing on the ledger that do not appear in his passbook,
inclusive of the withdrawal made on November 16, 1989. She saw the
three (3) withdrawal slips and in the withdrawal slip dated November 16,
1989 the initial after the figure 11-17-89 is the customary initial of the
petitioner. She claimed that she was familiar with the customary initial of
the petitioner. The withdrawal slip dated November 16, 1989 was made
after 3:00 o'clock in the afternoon of the same day but was stamped 11-
17-89, as it is bank regulation that all transactions made after 3:00 p.m.
will be entered in the book the next day.
De Lazo further testified that at the commencement of the business hour,
petitioner gets cash from the treasurer and her beginning cash on
November 17, 1989 per Teller's Daily Report was P355,984.53 which she
used to serve all kinds of transactions pertaining to withdrawals. The
initial over the typewritten name "agroque" is the customary initial of the
petitioner, Asuncion Galang Roque. De Lazo claimed to be familiar with it.
At the end of the work day petitioner prepared the Abstract of Payment,
which is a summary of the withdrawals the teller paid that day as
evidenced by several withdrawal slips.
De Lazo testified that before the petitioner went on forced leave petitioner
sought her assistance because she feared she would be removed from
work. She claimed that petitioner admitted to taking some money from
the depositors, including the account of Sgt. Salazar. Unable to help
petitioner, she referred her to Col. Dunilayan, the president and chairman
of the BABSLA, who told her to return the money immediately. Petitioner
told Col. Dunilayan that she would return the money. She failed to do so.
During the same meeting, petitioner, in the presence of Col. Dunilayan
and de Lazo, prepared a list containing the names of members from
whose accounts she took money. Petitioner gave the list to Col.
Dunilayan. When petitioner failed to return the money they decided to file
a case against her. In the morning of November 17, de Lazo was already
aware of the taking of the P10,000 that occurred the day prior. Since she
BANKING | Nature of Funds Deposited | 74
had full trust and confidence in petitioner, and did not fear that this
anomaly would persist, she did not ask for the presentation of the
passbook so that the corresponding entries could be made in order to
avoid a discrepancy between the ledger and the passbook, nor did she
send notice to Antonio Salazar. It is the practice of the bank that all
withdrawals require the presentation of the passbook. This was the first
instance that a transaction was not recorded in the passbook. There are
only a few cases wherein she (de Lazo) allows deposits to be made
without the presentation of the passbook on the same day. In these
instances she just requires the depositor to come some other time for the
recording of the transaction in the passbook. As of the date of this
testimony, the BABSLA had already paid deposits on accounts from which
the petitioner had taken money, including that of Antonio Salazar as
indicated in the bank records.3
The third and last prosecution witness is Reynaldo Manlulu, who is both
the treasurer and a member of the board of directors of the BABSLA. He
testified that petitioner was the teller of the BABSLA in November 1989
and that she reported for work on the 17th of that month. He intimated
that on that date petitioner got a beginning cash from him amounting to
P355,984.53, including all the the transactions that occurred after 3:00
p.m. of the preceding day. This beginning cash can be seen in the Teller's
Daily Report. The signature above the typewritten name "agroque" is
petitioner's because she signed it in his presence. Apart from the
beginning cash, he also turned over to petitioner the transactions that
took place after 3:00 p.m. of the preceding day, particularly the
withdrawal slip of MSgt. Salazar. At the end of the business day of
November 17, 1989, she prepared an abstract of payment and in this
abstract the initial over the typewritten name "agroque" is the initial of
the petitioner because she signed it in his presence. Petitioner paid the
withdrawal of P16,300 evidenced by the withdrawal slips attached to the
abstract of payment. After she prepared the abstract of payment,
petitioner turned over to him the cash and all the transactions that were
taken after 3:00 p.m. A Cash Count shows the total cash that petitioner
turned over to him. The initial over the typewritten name "agroque" is
petitioner's because it was signed in his presence.4

The evidence for the petitioner consists of the testimony of the petitioner
herself and that of Atty. Norbin Dimalanta and Exhibits 1 to 5 with sub-
markings.
Petitioner, Asuncion Galang Roque, testified that she was employed as
teller at the BABSLA from 1979 until her termination in 1990. In the
morning she gets the money from the treasurer and they do a cash count
which is reflected in the Teller's Daily Report and at 3:00 p.m. she
prepares and submits an abstract of payment. However, before making
the abstract, she and the treasurer conduct a cash count and the
remaining cash is turned over to the treasurer. As a teller, she received
deposits and payments, deposits of checks and payments of loans. She
does not discharge any memorandum or withdrawals unless both the
manager and the treasurer previously approve it. Depositors cannot
withdraw after 3:00 p.m., unless they talk to the manager or treasurer.
Withdrawals done after 3:00 p.m. are reflected as transactions of the
following day. She insisted that the charge against her of stealing and
carrying away P10,000 is false since she did not prepare the withdrawal
slip dated November 16, 1989 which involves the account of Antonio
Salazar. She also denied forging the signature of Salazar and affixing her
initial. Petitioner also disowned the initial in the abstract of payment dated
November 17, 1989 and the initials on several withdrawal slips. She
claimed to be innocent and contended that Rosalina de Lazo is the one
who is guilty because she was only used by the president. The latter is
still connected with the BABSLA while the petitioner was terminated in
June 1990.
Throughout the eleven years that petitioner worked as a teller at the
BABSLA, she had never been absent from work or required by the
treasurer to explain any discrepancy or anomaly related to the cash that
she handled as a teller. Before her dismissal, petitioner was not
suspended by the board of directors of the BABSLA during the
investigation of her case. She was put on forced leave which eventually
led to her termination. The manager was also supposed to be on forced
leave. However, when the manager reported for work and some members
protested and filed a petition, the president asked them to retract their
BANKING | Nature of Funds Deposited | 75
statements by means of executing an affidavit of desistance. Even though
petitioner received notice regarding the investigation, she did not attend
because she knew the personalities of the members of the committee.
Only the accused and the complainants whose accounts were withdrawn
were investigated. She filed a complaint with the Department of Labor in
connection with her dismissal but it was dismissed because she did not
pursue it. Apart from the president, there were seven (7) members of the
board of directors of the BABSLA in 1990: Col. Dunilayan, Col. Sanchez,
MSgt. Romero, Sgt. Manlulu, Sgt. Torato, Mrs. Bagasbas and Capt.
Baluyut. Capt. Baluyut was subsequently dimissed as a member of the
board of directors.5
The second witness for the petitioner was Atty. Norbin Dimalanta. He
averred that he only gave advice regarding the legality of the possible
dismissal of the petitioner based on the evidence the committee gathered.
He was present when the evidence and witnesses were presented. Proper
notices were sent to the accused. The chairman of the committee,
Leonardo Tolentino, concluded that the initials on the withdrawal slips
were similar to the petitioner's initials. He did not suggest the consultation
of a handwriting expert on forgery since there were other pieces of
evidence showing that the petitioner figured in the anomaly because
several witnesses identified the figures appearing in the original copy of
the questioned receipt as written by the petitioner. His conclusion that no
one else could have done it except for Mrs. Roque was arrived at only
after the investigation of the records and documents presented to the
committee.6
The RTC found the petitioner guilty beyond reasonable doubt of the crime
charged, on the following grounds:
After a careful evaluation of the evidence presented by both sides, the
Court finds that the prosecution has proved the guilt of the accused
beyond reasonable doubt. This finding is supported by the categorical
testimony of prosecution witness Reynaldo Manlulu who testified that on
November 17, 1989 accused received from him a beginning cash in the
amount of P355,984.53 which is shown in a Teller's Daily Report (Exh. D)

prepared by the accused and signed by the accused in his presence ( TSN,
March 25, 1993, page 3). At the close of business day of November 17,
1989 the accused also prepared an Abstract of Payment (Exh. E) and she
signed it in his presence (Id., page 6). Aside from the beginning cash he
also turned over to the accused the transactions that took place after 3:00
o'clock of the preceding day particularly the withdrawal slip of M/Sgt.
Salazar (Id., page 4) so that it can be entered on the records on that very
date as bank regulation requires that transactions occurring after 3:00
o'clock of a particular day are recorded the following day. This explains
why although the questionable withdrawal slip was dated November 16,
1989 it was stamped paid on November 17, 1989, for record purposes.
Since it was the accused who gave Reynaldo Manlulu the withdrawal slip
dated November 16, 1989 the presumption is that, being in possession of
said withdrawal slip before its delivery to Reynaldo Manlulu, the accused
is the one who prepared the said withdrawal slip. This particular
transaction was turned over to him by the accused the previous day (Id.,
page 5).
The Teller's Daily Report dated November 17, 1989 reflects, among
others, a total withdrawal on that date in the amount of P16,300.00. This
amount is the totality of withdrawal after adding the seven (7) legitimate
withdrawals amounting to P6,300.00 (Exhs. E-2 to E-8) and the
questionable withdrawal of P10,000.00 (Exh. C). On the other hand, the
Abstract of Payment (Exh. E) reflects, among others, a savings withdrawal
of P16,300.00 which tallies with the Teller's Daily Report of that date and
with the seven (7) withdrawal slips.
The defense interposed by the accused is one of denial. She claimed that
all the initials in the withdrawal slip of P10,000.00 (Exh. C), on the Teller's
Daily Report (Exh. D), in the Abstract of Payment (Exh. E) as well as on
the list of names of depositors (Exh. G) are not hers, implying, therefore,
that these documents were prepared by somebody else. To emphasize
that the initials on Exhibits C, D, E, and G are not hers, accused during
the hearing on March 18, 1993 wrote six (6) of her initials in a piece of
paper (Exh. "1"). However, the Court is not in a position to state whether
the initial in Exhibit 1 is the same or different from the initials in Exhibits
BANKING | Nature of Funds Deposited | 76
C, D, E, and G not being an expert along that line. Accused could have
very well availed of court processes to request the NBI or PNP Crime
Laboratory to determine whether or not the initials in Exhibits C, D, E,
and G are hers by comparing the same with similar documents on file with
the BABSLA which are abundant as said documents are prepared daily
and accused was, prior to her dismissal, the only teller of BABSLA for over
a year and has therefore accomplished a lot of these documents.
Unfortunately, accused did not make any attempt to do so. At any rate,
denial cannot prevail over the affirmative and categorical testimony of
Reynaldo Manlulu who stated that accused turned over to him the
questionable withdrawal slip on November 16, 1989 and it was in turn
returned to the accused by said witness the following day November 17,
1989 in order that said transaction may be reflected on the records on
that date. Said witness also positively testified that the accused initialed
in his presence the Teller's Daily Report and the Abstract of Payment
which said accused prepared on November 17, 1989. Denial is a self-
serving negative evidence that cannot be given greater weight than the
declaration of credible witnesses who testified on affirmative matters
(People vs. Carizo, 233 SCRA 687). Like alibi, denial is inherently a weak
defense and cannot prevail over the positive and credible testimony of
the prosecution witnesses (People vs. Macagaleng, 237 SCRA 299).
Accused after denying that the initials over the typewritten name A. G.
Roque found in several exhibits introduced by the prosecution are not
hers concentrated [on] her defense that Rosalina de Lazo, another
prosecution witness, and the General manager of BABSLA was the author
of the anomaly being imputed against her because said witness has
committed certain anomalous transactions at the BABSLA in the past.
Accused, however, never mentioned a word about the testimony of
Reynaldo Manlulu which actually proved her undoing. She failed to
controvert nor even comment on the damaging testimony of Reynaldo
Manlulu that she turned over to him the questionable withdrawal slip and
signed and/or placed her initial on the Teller's Daily Report and Abstract
of Payment in his presence. Accused did not present any evidence that
Reynaldo Manlulu had ulterior motives to testify falsely against her. When
there is no evidence indicating that the principal witness for the

prosecution was moved by improper motive, the presumption is that he
was not so moved, and his testimony is entitled to full faith and credit.
(People vs. Perciano, 233 SCRA 393). Accused also failed to controvert
the testimony of Rosalina de Lazo that accused confessed before Col.
Dunilayan, the president of BABSLA that she took money from some
depositors which she promised to return and in fact wrote down the
names of said depositors before Col. Dunilayan in a piece of paper which
she handed to him. This fact and [it being] taken in the light that she
failed to appear for investigation after the anomaly was discovered
despite due notice, and her lack of interest to pursue a case she filed
before the Department of Labor which caused its dismissal, do not speak
well of her claim of innocence.
Art. 309, paragraph 2 of the Revised Penal Code provides that the penalty
for theft is prision correccional in its medium and maximum periods if the
value property stolen is more than P6,000.00 but does not exceed
P12,000.00 and since the accused is charged for qualified theft, and the
property or money stolen is P10,000.00, under Art. 310 the penalty
prescribed for this crime is increased two (2) degrees higher, the basis of
which is Art. 309, paragraph 2. Therefore the corresponding penalty is
prision mayor maximum to reclusion temporal minimum. However, as the
accused is qualified [under] the indeterminate sentence law, the
prescribed penalty for her in this case is prision mayor as minimum to
reclusion temporal as maximum.
WHEREFORE, judgment is rendered finding the accused guilty beyond
reasonable doubt of the crime of qualified theft as charged and she is
hereby sentenced to suffer the penalty of 6 years and 1 day of prision
mayor as minimum to 12 years, 2 months and 1 day of reclusion temporal
as maximum, and to indemnify the offended party Basa Air Base Savings
& Loan Association Inc. in the amount of P10,000.00, and to pay the
costs. SO ORDERED.7
On appeal, the appellate court found the conviction in accord with law and
the evidence and affirmed the decision of the RTC in toto. The Court of
Appeals, quoting at length the lower court, reasoned, thus:
BANKING | Nature of Funds Deposited | 77
The Court fully agrees with the court a quo in finding that appellant's guilt
has been proven beyond reasonable doubt. As aptly pointed out by the
lower court:
This finding is supported by the categorical testimony of prosecution
witness Reynaldo Manlulu who testified that on November 17, 1989
accused received from him a beginning cash in the amount of
P355,984.53 which is shown in a Teller's Daily Report (Exh. D) prepared
by the accused and signed by the accused in his presence (TSN, March
25, 1993, page 30). At the close of business day of November 17, 1989
the accused also prepared an Abstract of Payment (Exh. E) and signed it
in his presence (Id., page 6). Aside from the beginning cash he also
turned over to the accused the transaction that took place after 3:00
o'clock of the preceding day particularly the withdrawal slip of M/Sgt.
Salazar (Id., page 4) so that it can be entered on the records on that very
date as bank regulation required that transaction occurring after 3:00
o'clock of a particular day are recorded the following day. This explains
why although the questionable withdrawal slip was dated November 16,
1989 it was stamped paid on November 17, 1989 for record purposes.
Since it was the accused who gave Reynaldo Manlulu the withdrawal slip
dated November 16, 1989 the presumption is that being in possession of
said withdrawal slip before its delivery to Reynaldo Manlulu the accused
is the one who prepared the said withdrawal slip. This particular
transaction was tuned over to him by the accused the previous day (Id.,
page 5).
The Teller's Daily Report dated November 17, 1989 reflects among others
a total withdrawal on that date in the amount of P16,300.00. This amount
is the totality of withdrawal after adding the seven (7) legitimate
withdrawals amounting to P6,300.00 (Exhs. E-2 to E-8) and the
questionable withdrawal of P10,000.00 (Exh. C). On the other hand the
Abstract of Payment (Exh. E) reflects among others a savings withdrawal
of P16,300.00 which tallies with the Teller's Daily Report of that date and
with the seven (7) withdrawal slips.

Appellant's defense is one of denial. She claims that the initials in the
withdrawal slip of P10,000.00 (Exh. C) the Teller's Daily Report (Exh. D)
the Abstract of Payment (Exh. E) and list of names of depositors (Exh. G)
are not hers thus implying that these documents were prepared by
somebody else. To bolster her claim she wrote her initials six (6) times
on a piece of paper during the hearing on March 18, 1993 (Exh. 2)
probably for comparison purposes. Admittedly there are noticeable
differences between her initials in Exhibit 2 and those appearing on
Exhibits C to G. This is of course understandable. It was not difficult for
appellant to feign her initials in Exhibit 2 in order to mislead the Court.
At any rate no less than Rosalina de Lazo who as general manager of
BABSLA is familiar with the initials has positively identified the initials on
Exhibits C to G as hers. Likewise, Reynaldo Manlulu categorically stated
not only that the questionable withdrawal slip (Exh. C) was turned over
to him by appellant on November 16, 1989 and returned to her on
November 17, 1989 but also that the Teller's Daily Report (Exh. D) and
the Abstract of Payment (Exh. E) were initialed by her in his presence.
Needless to say the initials in Exhibits C, D, and E bear such similarities
as would lead to the conclusion that they were prepared by one and the
same person. Hence, a more worthy and reliable evidence than the mere
samples of her initials written during the trial is required to controvert the
positive testimonies of Rosalina de Lazo and Reynaldo Manlulu.
No cogent reason has been shown for this court not to give credence to
the prosecution witnesses. As aptly observed by the court a quo:
Accused after denying that the initials over the typewritten name A.G.
Roque found in several exhibits introduced by the prosecution are not
hers concentrated [on] her defense that Rosalina de Lazo another
prosecution witness and the General Manager of BABSLA was the author
of the anomaly being imputed against her because said witness has
committed certain anomalous transactions at the BABSLA in the past.
Accused however, never mentioned a word about the testimony of
Reynaldo Manlulu which actually proved her undoing. She failed to
controvert nor even comment on the damaging testimony of Reynaldo
BANKING | Nature of Funds Deposited | 78
Manlulu that she turned over to him the questionable withdrawal slip and
signed and/or placed her initial on the Teller's Daily Report and Abstract
of Payment in his presence. Accused did not present any evidence that
Reynaldo Manlulu had ulterior motives to testify falsely against her. When
there is no evidence indicating that the principal witness for the
prosecution was moved by improper motive the presumption is that he
was not so moved and his testimony is entitled to full faith and credit.
(People vs. Perciano 233 SCRA 393). Accused also failed to controvert the
testimony of Rosalina de Lazo that the accused confessed before Col.
Dunilayan the president of BABSLA that she took money from some
depositors which she promised to return and in fact wrote down the
names of said depositors before Col. Dunilayan in a piece of paper which
she handed to him. This fact and [it being] taken in the light that she
failed to appear for investigation after the anomaly was discovered
despite due notice, and her lack of interest to pursue a case she filed
before the Department of Labor which caused its dismissal, do not speak
well of her claim of innocence.
In sum, the Court finds appellant's conviction of the offense charged in
accord with law and evidence.8
Petitioner now raises the following issues:
I WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
AFFIRMED THE DECISION OF THE LOWER COURT CONVICTING
PETITIONER OF THE CRIME OF QUALIFIED THEFT THROUGH
FALSIFICATION OF BANK DOCUMENTS?
II WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
AFFIRMED THE DECISION OF THE LOWER COURT CONVICTING
PETITIONER OF THE CRIME OF QUALIFIED THEFT BECAUSE OF THE
WEAKNESS OF THE DEFENSE OFFERED BY PETITIONER AND NOT ON THE
STRENGTH OF THE EVIDENCE OF THE PROSECUTION?
III WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
AFFIRMED THE DECISION OF THE LOWER COURT CONVICTING
PETITIONER OF THE CRIME OF QUALIFIED THEFT IN THE ABSENCE OF

ANY EVIDENCE WHETHER TESTIMONIAL OR DOCUMENTARY TO THE
EFFECT THAT PETITIONER WAS SEEN OR CAUGHT IN THE ACT OF TAKING
OR CARRYING AWAY THE SUM OF P10,000.00?
IV WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
AFFIRMED THE DECISION OF THE LOWER COURT CONVICTING
PETITIONER OF THE CRIME OF QUALIFIED THEFT WHEN THE AMOUNT OF
P10,000.00 WHICH CONSTITUTES THE CORPUS DELICTI OR BODY OF
THE CRIME WAS NEVER OFFERED IN EVIDENCE BY THE PROSECUTION?
V WHETHER OR NOT THE COURT OF APPEALS CORRECTLY
AFFIRMED THE DECISION OF THE LOWER COURT CONVICTING
PETITIONER OF THE CRIME OF QUALIFIED THEFT WHEN THE
PROSECUTION FAILED TO PROVE BEYOND REASONABLE DOUBT THE
FACT OF LOSS OF THE AMOUNT OF P10,000.00 IN THE ABSENCE OF ANY
AUDIT BY AN INDEPENDENT AUDITOR?9
Said issues may be summed up into two:
1. Whether or not qualified theft may be committed when the personal
property is in the lawful possession of the accused prior to the commission
of the alleged felony?
2. Whether or not the elements of qualified theft were proven?
First Issue
Petitioner contends:
Theft as defined in Article 308 of the Revised Penal Code requires physical
taking of another's property without violence or intimidation against
persons or force upon things.
The crime of theft is akin to the crime of robbery. The only difference is
in robbery there is force upon things or violence or intimidation against
persons in taking of personal properties. In the crime of theft the taking
of the personal property with intent to gain is without violence against or
intimidation of persons nor force upon things and the taking shall be
BANKING | Nature of Funds Deposited | 79
without the consent of the owner. In robbery, the taking is against the
will of the owner.
Under Article 308 of the Revised Penal Code, the following are the
elements of the crime of theft:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon
things.
The foregoing requirements presume that the personal property is in the
possession of another, unlike estafa, [where] the possession of the thing
is already in the hands of the offender. In People vs. Lacson, 57 Phil. 325,
it was held:
"Commentators on the Spanish Penal Code lay great stress on the taking
away, that is, getting possession in theft, laying hold of the thing, so that
if the thing is not taken away, but received and then appropriated or
converted, without consent of the owner, it may be any other crime, that
of estafa for instance."
Can a person tasked to receive and collect capital contributions and
having collected and received in her capacity as teller as alleged in the
information, be guilty of theft? The question should be answered in the
negative. xxx10
Petitioner's argument contradicts jurisprudence. In U.S. v. De Vera,11 the
accused, Nieves de Vera, received from Pepe, an Igorot, a bar of gold
weighing 559.7 grams for the purpose of having a silversmith examine
the same, and bank notes amounting to P200 to have them exchanged
for silver coins. Accused appropriated the bar of gold and bank notes. This
Court, citing Spanish and U.S. jurisprudence, ruled that the crime
committed was theft and not estafa since the delivery of the personal

property did not have the effect of transferring the juridical possession,
thus such possession remained in the owner; and the act of disposal with
gainful intent and lack of owner's consent constituted the crime of theft.
The principle enunciated in U.S. v. De Vera was reiterated in People v.
Trinidad,12 thus:
The defendant received a finger ring from the offended party for the
purpose of pledging it as security for a loan of P5 for the benefit of said
offended party. Instead of pledging the ring, the defendant immediately
carried it to one of her neighbors to whom she sold it for P30 and
appropriated the money to her own use.
xxx
The defendant is undoubtedly guilty of having sold the ring without
authority and the only question which presents some difficulty is to
determine whether the crime committed was theft or whether it should
be classified as estafa. The question is discussed at length in the case of
United States vs. De Vera (43 Phil., 1000) in which the court, citing
various authorities, held that "When the delivery of a chattel or cattle has
not the effect of transferring the juridical possession thereof, or title
thereto, it is presumed that the possession of, and title to, the thing so
delivered remains in the owner; and the act of disposing thereof with
intent of gain and without the consent of the owner constitutes the crime
of theft." This view seems to be supported both by Spanish and American
authorities.
xxx
Though the facts in the present case differs somewhat from those in the
De Vera case, the underlying principle is the same in both cases: the
juridical possession of the thing appropriated did not pass to the
perpetrators of the crime, but remained in the owners; they were agents
or servants of the owners and not bailees of the property. (See 17 R. C.
L., 43, par. 49.) But it has been suggested that one of the essential
elements of the crime of theft is that the intent to misappropriate the
BANKING | Nature of Funds Deposited | 80
property taken must exist at the time of the asportation and that while
this element clearly existed in the De Vera case, it is not as apparent in
the case at bar.
We may agree that in cases such as the present the crime committed
should not be regarded as theft unless the circumstances are such that it
must be presumed that the intent to convert or misappropriate the
property existed at the time it was received by the perpetrator of the
crime. But the existence of such intent is, in our opinion, fully as apparent
in this case as it was in the De Vera case; the defendant, according to her
own statement, offered the ring for sale immediately after its delivery to
her, and we are forced to conclude that she did not receive it with honest
intentions, but had the disposal of it in mind at the time.
In the case of People v. Locson13 which also deals with money of a bank
in the possession of its teller, the Court articulated:
Although the question is not specifically raised in the assignments of
error, the court has carefully considered the classification of the crime
committed by the defendant and found it to be correctly classified by the
trial court as qualified theft. The money was in the possession of the
defendant as receiving teller of the bank, and the possession of the
defendant was the possession of the bank. When the defendant, with a
grave abuse of confidence, removed the money and appropriated it to his
own use without the consent of the bank, there was the taking or
apoderamiento contemplated in the definition of the crime of theft.
In the case of the United States vs. De Vera (43 Phil., 1000, 1003), Justice
Villamor speaking for the court said:
"The argument advanced in support of the contention of the defense is
that the goods misappropriated were not taken by the accused without
the consent of the owner who had delivered them to her voluntarily, and
this element being lacking, it cannot be the crime of theft.
"It is well to remember the essential elements of the crime of theft, as
expounded in the textbooks, which are as follows: First, the taking of

personal property; second, that the property belongs to another; third,
that the taking away be done with intent of gain; fourth, that the taking
away be done without the consent of the owner; and fifth, that the taking
away be accomplished without violence or intimidation against persons or
force upon things.
"The commentators on the Spanish Penal Code, from which ours was
adopted, lay great stress on the first element, which is the taking away,
that is, getting possession, laying hold of the thing, so that, as Viada says,
if the thing is not taken away, but received and then appropriated or
converted without the consent of the owner, it may be any other crime,
that of estafa for instance, but in no way that of theft, which consists in
the taking away of the thing, that is, in removing it from the place where
it is kept by the legal owner, without the latter's consent, that is, without
obtaining for the purpose the consent of the legitimate owner."
The doctrine of the case as stated in the syllabus is as follows:
"When the delivery of a chattel or cattle has not the effect of transferring
the juridical possession thereof, or title thereto, it is presumed that the
possession of, and title to, the thing so delivered remains in the owner;
and the act of disposing thereof with intent of gain and without the
consent of the owner constitutes the crime of theft."
The Supreme Court of Spain in a decision of June 23, 1886 held that a
shepherd, who takes away and converts to his own use several head of
the sheep under his care, is guilty of qualified theft. (Viada: Vol. 3, p.
433, 4th ed.)
In the case of People v. Isaac,14 which involved a temporary driver of a
public service vehicle, this Court pronounced:
In the case of U. S. vs. De Vera (43 Phil., 1000), this Court said that when
the delivery of a chattel has not the effect of transferring the juridical
possession thereof, or title thereto, it is presumed that the possession of,
and title to, the thing so delivered remains in the owner; and the act of
disposing thereof with intent of gain and without the consent of the owner
BANKING | Nature of Funds Deposited | 81
constitutes the crime of theft. This, we think, is actually the case here.
For as we see it, appellant had only substituted for the regular driver of a
vehicle devoted to the transportation of passengers for a fare or
compensation and therefore operated as a public utility; and while his
arrangement with the owner was to turn in, not all the fare collected, but
only a fixed sum known in the trade as "boundary", still he cannot be
legally considered a hirer or lessee, since it is ordained in section 26 of
the Rules of Regulations of the Public Service Commission that "no motor
vehicle operator shall enter into any kind of contract with any person if
by the terms thereof it allows the use and operation of all or any of his
equipment under a fixed rental basis." In the eye of the law then,
appellant was not a lessee but only an employee or agent of the owner,
so that his possession of the vehicle was only an extension of that of the
latter. In other words, while he had physical or material possession of the
jeepney, the juridical possession thereof remained in the owner. Under
those circumstances his disposing of the jeepney with intent of gain and
without the consent of its owner makes him guilty of theft.
Quoting from Ruling Case Law, this Court has also said in the same case:
"A felonious taking is necessary in the crime of larceny, and generally
speaking, a taking which is done with the consent or acquiescence of the
owner of the property is not felonious. But if the owner parts with the
possession thereof for a particular purpose, and the person who receives
the possession avowedly for that purpose has the fraudulent intention to
make use of it as the means of converting it to his own use and does so
convert it, this is larceny, for in such case, the fraud supplies the place of
the trespass in the taking, or, as otherwise stated, the subsequent
felonious conversion of the property by the alleged thief will relate back
and make the taking and conversion larceny."
Under this theory, appellant, who, according to his own confession, took
the vehicle from its owner already with the intention of appropriating it,
should also be deemed guilty of theft. (People vs. Trinidad, 50 Phil., 65.)
In the present case, what is involved is the possession of money in the
capacity of a bank teller. In People v. Locson,15 cited above, this Court

considered deposits received by a teller in behalf of a bank as being only
in the material possession of the teller. This interpretation applies with
equal force to money received by a bank teller at the beginning of a
business day for the purpose of servicing withdrawals. Such is only
material possession. Juridical possession remains with the bank. In line
with the reasoning of the Court in the above-cited cases, beginning with
People v. De Vera, if the teller appropriates the money for personal gain
then the felony committed is theft and not estafa. Further, since the teller
occupies a position of confidence, and the bank places money in the
teller's possession due to the confidence reposed on the teller, the felony
of qualified theft would be committed.
Second Issue
The elements of qualified theft include the elements of theft and any of
the circumstances enumerated in Article 310 of the Revised Penal
Code16 (RPC). The elements of theft, which is defined in Artilce 308 of the
RPC,17 are the following:
xxx there are five essential elements which constitute the crime of theft,
namely: (1) Taking of personal property; (2) that said property belongs
to another; (3) that said taking be done with intent to gain; (4) that,
further, it be done without the owner's consent; and (5) finally, that it be
accomplished without the use of violence or intimidation against persons,
nor of force upon things.18
The specific qualifying circumstance in Article 310 of the RPC which the
information indicated was that the felony was committed with grave
abuse of confidence. Hence, to warrant a conviction, the prosecution
should have proven the following elements:
1. Taking of personal property.
2. That the said property belongs to another.
3. That the said taking be done with intent to gain.
4. That it be done without the owner's consent.
5. That it be accomplished without the use of violence or intimidation
against persons, nor of force upon things.
6. That it be done with grave abuse of confidence.
BANKING | Nature of Funds Deposited | 82
Regarding the first element, the taking of personal property, the
prosecution was not able to present direct evidence that petitioner took
the P10,000 on November 16, 1989. The prosecution attempted to prove
the taking through circumstantial evidence. One of the pieces of evidence
that the prosecution adduced and the trial court and Court of Appeals
relied on heavily for the conviction was the withdrawal slip for P10,000,
dated November 16, 1989. Antonio Salazar disowned the signature on
the withdrawal slip. However, he also indicated that he did not know who
made the withdrawal. Rosalina de Lazo testified that the initial on the
withdrawal slip, written after the figure 11-17-89, was the customary
signature of petitioner. She, however, did not intimate the significance of
petitioner's initial on the withdrawal slip. A careful inspection of all the
withdrawal slips,19 including the withdrawal slip stated above, shows that
the date and the initial of petitioner were written across the stamped word
"paid." This indicates that petitioner's initial was placed in her capacity as
a teller which, therefore, only proves that this transaction passed through
her hands in such capacity. It does not in any manner show that petitioner
prepared the withdrawal slip or that the proceeds of the withdrawal
increased her patrimony.
The trial court articulated and the Court of Appeals quoted in toto the
following:
Since it was the accused who gave Reynaldo Manlulu the withdrawal slip
dated November 16, 1989 the presumption is that, being in possession of
said withdrawal slip before its delivery to Reynaldo Manlulu, the accused
is the one who prepared the said withdrawal slip. This particular
transaction was turned over to him by the accused the previous day20
This presumption is without basis in law. Under the rules of evidence,
there is a fixed number of presumptions. These are contained in Sections
2 and 3 of Rule 131, of the Revised Rules of Court. Courts of law should
not be too ready to generate other presumptions. After a thorough review
of all the presumptions enumerated in Sections 2 and 3 of Rule 131, the
presumption that comes closest to the one the RTC and Court of Appeals
relied on is paragraph (j), Section 3 of Rule 131, which reads:

That a person found in possession of a thing taken in the doing of a recent
wrongful act is the taker and the doer of the whole act; otherwise, that
things which a person possesses, or exercises acts of ownership over, are
owned by him;
In a long line of cases,21 this Court has always applied this presumption
to a situation where property has been stolen and the stolen property is
found in the possession of the accused. In these cases the possession of
the accused gives rise to the presumption that the accused is the taker of
the stolen property. In the presumption availed of by the lower courts the
property found in the possession of the accused, which is the withdrawal
slip, is not stolen property. Furthermore, the presumption the lower court
made was not that the petitioner stole anything, but rather that the
petitioner was the maker of the withdrawal slip. It is plain that the
presumption used by the lower court and the one found in paragraph (j),
Section 3 of Rule 131 are different. Consequently, there is no basis for
the finding that the withdrawal slip was prepared by the petitioner.
Another piece of evidence offered to prove petitioner's taking is her
extrajudicial confession to de Lazo and Col. Dunilayan wherein she
allegedly admitted taking money from the accounts of several members
of the BABSLA and the list of people from whose accounts she took
money, which list petitioner supposedly prepared in the presence of de
Lazo and Col. Dunilayan. In the testimony of Rosalina de Lazo, all she
mentioned was that petitioner confessed to having taken sums of money
from the accounts of several depositors, including the account of Sgt.
Salazar. Nowhere in her testimony did she mention that petitioner
confessed the exact date on which she took the money, nor the amount
she took from the account of Sgt. Salazar. It cannot be deduced from the
alleged verbal confession of petitioner that she was confessing a specific
taking of P10,000 from the account of Sgt. Salazar on November 16,
1989. She also saw petitioner prepare the list of depositors from whose
accounts she had taken some money. Again, a perusal of the handwritten
list allegedly prepared by petitioner does not disclose any relation to the
specific taking alleged in the information. All that was written on the list,
among other names and figures, was the name Salazar, Antonio and the
BANKING | Nature of Funds Deposited | 83
number fifteen (15) to the right of the name. It must be kept in mind that
the information was for a theft of P10,000 that occurred on the 16th of
November 1989. The list does not mention the date on which the money
was taken. Neither does it disclose the precise amount that was taken.
The other pieces of evidence such as the Teller's Daily Report and Abstract
of Payment, to which witnesses de Lazo and Salazar both testified as
containing the customary initials of petitioner, only corroborate the
withdrawal slip. They merely reveal that on the 16th of November 1989,
a withdrawal was made on the account of Sgt. Antonio Salazar and that
this withdrawal passed through the hands of petitioner in her capacity as
a teller of the BABSLA. Again, they prove neither that petitioner prepared
the subject withdrawal slip nor that she took the P10,000 on that date.
From the foregoing discussion it is plain that the prosecution failed to
prove by direct or sufficient circumstantial evidence that there was a
taking of personal property by petitioner.
A discussion of the other elements of qualified theft mentioned above is
not necessary. Even if the other elements were satisfactorily proven, the
first and most basic element of qualified theft was not established. The
prosecution was, therefore, unsuccessful in proving beyond reasonable
doubt that the petitioner committed the crime of qualified theft.
WHEREFORE, the petition is GRANTED and the decision and resolution of
the Court of Appeals dated December 28, 1998 and May 26, 1999,
respectively, are REVERSED and SET ASIDE. Petitioner, Asuncion Galang
Roque, is ACQUITTED of the crime of qualified theft charged in the
information. No costs.
SO ORDERED.
 BANKING | Nature of Funds Deposited | 84

QUALIFIED THEFT
G.R. No. L-35681 October 18, 1932
THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellee,
vs.
TEODORO I. LOCSON, Defendant-Appellant.
VICKERS, J.:
This is an appeal from a decision of Judge A. Horrilleno of the Court of
First Instance of Zamboanga finding the defendant guilty of the crime of
qualified theft and sentencing him to suffer twelve years, ten months, and
twenty days of cadena temporal and the accessory penalties of the law,
to return to the Bank of the Philippine Islands the sum of P33,965.45, and
to pay the costs. The defendant and appellant make the following
assignment of errors:
1. The trial court erred in accepting as more worthy of belief and
consideration the contradictory and improbable testimony of the
witnesses for the prosecution, absolutely ignoring the trustworthy
evidence submitted by the unbiased witnesses that testified for the
defense.
2. The trial court also erred in making conclusion and findings of facts
absolutely unsupported by the evidence presented during the trial, and in
convicting the accused on the strength of mere circumstantial evidence,
which did not exclude each and every reasonable hypothesis consistent
with the innocence of the defendant.
of P33,965.45, and to pay the costs, notwithstanding the insufficiency of
the evidence.
The defendant was tried on a plea of not guilty to the following
information:
The undersigned accuses Teodoro I. Locson of the crime of qualified theft,
committed as follows:
That on or about the 8th day of June, 1930, and within the jurisdiction of
this court, viz., in the municipality of Zamboanga, Province of
Zamboanga, P. I., the above named defendant, being an employee of the
Bank of the Philippine Islands, Zamboanga branch, as receiving teller, did
then and there wilfully, unlawfully and feloniously, taking advantage of
his said position as such receiving teller and with serious breach of
confidence, take and carry away with intent to gain and without the
consent of said bank, money in the total amount of P33,965.45,
equivalent to 169,827.25 pesetas belonging to the said bank. Contrary to
law.
Zamboanga, Zamboanga, October 7, 1930.
JOSE EVANGELISTA
Provincial Fiscal
The defendant was the receiving teller of the Zamboanga branch of the
Bank of the Philippine Islands. At the close of business on Saturday, June
7, 1930, he had in his possession the total sum of P48,461.58, consisting
of currency, pending checks, and foreign coins as follows:

3. The trial court finally erred in holding that the sum of P33,965.45 in In notes of P100 P300.00
question was not placed in the box and sack, when it was brought to the In notes of 50 250.00
vault on June 7, 1930, and that the accused took the said money; and in In notes of 20 10,440.00
finding the said accused guilty of the crime of qualified theft, imposing
In notes of 10 9,010.00
upon him the penalty of twelve (12) years, ten (10) months and twenty
In notes of 5 11,025.00
(20) days of cadena temporal, to suffer the accessory penalties provided In notes of 2 5,276.00
by law, and to return to the Bank of the Philippine Islands the said sum

In notes of 1 3,456.00
U.S.A. notes 1,634.00
Foreign currencies 47.45
Misc. checks pending 4,501.13
Mutilated bills 1,897.00
Phil. National Bank bills 165.00
Bank of the P. I. bills 460.00
48,461.58
This sum is referred to in the record as the "pico". It appears from the
evidence that it was checked by the cashier about 4.30 in the afternoon
of June 7th and found to be correct. The cashier, Donato de Llana, then
told the defendant to put the money in a money box and a sack and take
it to the third compartment of the vault known as the "grill". From the
defendant's cage, the cashier returned to his desk and then went to the
cage of the paying teller, Mateo Paulino, which adjoins that of the
receiving teller, to check the silver in the possession of the paying teller.
The cashier stepped out of the paying teller's cage to take part in a
conversation between the defendant and Vicente Guanzon, a clerk in the
foreign department of the bank, about the defendant's coming back to
the office to work the next morning. The defendant had gone outside of
his cage to talk to Guanzon. When the cashier was returning to the paying
teller's cage, he saw the janitor, Alfonso Basilio, followed by the
defendant, carrying the money box and sack to the vault. After
completing the check of the silver, the cashier went back to his desk to
enter in a book the figures showing the amount of the different items of
the "pico". A messenger, Eugenio Canseco, followed by the paying teller,
deposited the six trays of silver in the vault. Canseco then closed the door
to the compartment where the "pico" was kept. Alfonso Basilio,
accompanied by the cashier, carried a box of documents to the vault. The
cashier then locked the "grill" and the second door of the vault, and closed
the principal door of the vault, which has a combination lock. The cashier
put the key to the "grill" in a safe with a combination lock in the office,
closed it, and accompanied by Basilio left the office at 5.05 in the
afternoon. The defendant, who was waiting near the employees' entrance
BANKING | Nature of Funds Deposited | 85
to the bank, left on his bicycle, after telling the janitor, Alfonso Basilio, to
come to the bank early the next morning.
In the conversation between the defendant and Guanzon, to which we
have referred, Guanzon told the defendant that he would not come back
the next day because it was the fiesta of his barrio; that it was
unnecessary for the defendant to come back, because he could get from
the cashier a book containing the data he required for preparing certain
statistics and take it home with him, but the defendant insisted on coming
to the office Sunday morning to use the adding machine. The cashier then
gave the defendant the book, and told him to send Basilio to get the key
to the office the next morning.
The janitor, Alfonso Basilio, got the key to the office from the cashier next
morning and opened the bank about 8 o'clock. He entered defendant's
cage to dust it. When Basilio was stooping in the act of placing the cover
of the adding machine under the counter, the defendant arrived and
asked him what he was doing. The defendant was carrying a package
wrapped in a newspaper. Three minutes after the defendant arrived, he
sent Basilio out to buy ice. Basilio was gone for ten or twelve minutes,
and during this time the defendant was left alone in the bank. Soon after
the janitor came back, the defendant called him, and on entering
defendant's cage Basilio saw the defendant wrap a folded flour sack two
inches thick in a rice sack. Defendant told Basilio to tie this bundle to
defendant's bicycle, and watched him while he was fixing the bundle on
the bicycle. Defendant gave Basilio some figures to add on the adding
machine, and told him that he was going to the market to buy some
mangoes. He left the bank on his bicycle. He came back in about ten
minutes without the sacks, and said he did not buy any mangoes because
they were too dear. He then gave Basilio some other work to do. They
left the bank about 11 o'clock. Basilio locked the door and returned the
key to the cashier.
From the bank the defendant went to the market. Near the market he
engaged a calesa driven by Vicente Natividad, whom the defendant had
employed, on various previous occasions to take fish and vegetables to
 BANKING | Nature of Funds Deposited | 86

his house. They stopped at a store near the market, and there the notes, and exclaimed: "They are not here, or the bank notes of large
defendant put into the calesa a basket with a rolled sack on the cover. denominations which I put here on the afternoon of June 7th." As the
The defendant then told the cochero to take the basket to defendant's defendant pretended to be looking for the bank notes in his office and did
house. The defendant followed the calesa on his bicycle. When they not notify the cashier, the paying teller notified the cashier, who in turn
reached defendant's house, the defendant himself took the basket out of notified the manager, Victor J. Jimenez.
the calesa and paid the cochero 20 centavos.
The manager immediately asked the defendant where the money was.
Early that morning, about 7.15, before going to the bank, the defendant The defendant said he had put it in the box and the bag, adding that he
had stopped at the office of Marquez, a stevedoring firm, located across had put P15,000 in the box in ten-peso and twenty-peso bills and the rest
the street from the bank. He stood inside the door locking out, as if in the bag. When asked what had become of it the defendant said he did
watching for somebody. The stevedores were expecting a boat to be not know, that he did not have the keys to the vault. The manager then
unloaded. checked the "reserve" in the vault, amounting to P124,000, and found it
intact. He then checked the money in the box and the sack, and found
About noon on the same day, Sunday, the 8th of June, the defendant the shortage to be P33.965.45, made up as follows:
entered the Indian Bazar as it was about to close and bought a valise for
P5. A little later the defendant paid all that he owed to Gan San Lien, In notes of P100 P300.00
amounting to P65, giving him three twenty-peso bank notes and one five- In notes of 50 250.00
peso bank note. The defendant had been owing this balance since In notes of 20 10,440.00
February, 1930. In notes of 10 9,010.00
In notes of 5 11,025.00
The next morning, Monday, June 9, 1930, the defendant, contrary to his
In notes of 2 76.00
usual practice, was one of the last arrive at the office. There was already
In notes of 1 56.00
a customer in the bank, who desired to withdraw some money, but the
paying teller was unable to wait on her, because the defendant had not U.S.A. notes 1,634.00
Mutilated bills 502.00
come to deliver to the paying teller the money for the disbursements for
the day, and the paying teller referred her to the cashier, who was waiting Phil. National Bank bills 165.00
her when the defendant arrived. The defendant entered his cage, sat Bank of the P.I. bills 460.00
down and began to read a newspaper. When the cashier saw him, the Foreign currencies 47.45
cashier got the key to the "grill", went to the vault accompanied by the
messenger Canseco, and got the money box and sack containing the 33,965.45
"pico" of June 7th. Canseco delivered the money box to the defendant
The Constabulary and the police were immediately notified of this loss.
and sack to the paying teller. The paying teller poured out the contents
The chief of police of Zamboanga learned from Alfonso Basilio about the
of the sack on his counter. He noticed at once that the loose bank notes,
two sacks the defendant had taken from the bank. He went to defendant's
which were the first to be counted by him each morning, were missing.
house in the afternoon of June 9th and found two sacks in a laundry bag
He notified the defendant immediately. The defendant then opened the
behind the door in the defendant's bedroom which Basilio declared to be
money box, which was on his counter, as if to look for the loose bank

like those he had seen in defendant's possession. The money was never
recovered.
It appears from the evidence that about the latter part of April, 1930 the
defendant, contrary to the practice of the bank, began to retain a part of
the "pico", consisting of bank notes of big denominations, and he
persisted in this course to such a degree that the paying teller had call
his attention to the matter several times.
The evidence also shows that on Saturday, June 7th the manager said
the "pico" was too large, and that on Monday he would pay P30,000 to
the Chartered Bank or else send it to the head office of the Bank of the
Philippine Islands in Manila. The defendant was present when the
manager made this statement.
The defendant was receiving a salary of only P90 a month. He had debts
amounting to over a thousand pesos. Two or three months prior to June
7th, 1930, in connection with the newspaper reports of the Wilson case,
the defendant asked the accountant of the bank, Santa Elena, how long
bank notes would last if buried in the ground, and when the accountant
replied that it would depend on the container, the defendant inquired how
long they would last if kept in a tightly sealed earthen jar.
On June 13, 1930, Santiago Freixas, auditor of the Bank of the Philippine
Islands, examined the reserve fund of the Zamboanga branch. He found
it intact, but on examining the books of the bank he found a shortage of
more than P33,000 in the "pico" of June 7, 1930.
When the bank was opened on Monday Morning, June 9, 1930, all the
doors of the bank and the vault were in good condition. The doors of the
vault were found duly closed. There were no signs of robbery.
Various possibilities have been suggested to explain how the money might
have been taken from the vault, but they are so improbable that we do
not deem it worth while to consider more than one of them. Of course, if
it be assumed that the defendant was honest and all the other officers of
the bank corrupt and in collusion to loot the bank, it is easy enough to
BANKING | Nature of Funds Deposited | 87
conclude that the defendant is innocent. Defendant's attorneys assume
that the cashier had been embezzling the money of the bank, and that on
the afternoon of June 7th he took the amount in question from the "pico"
and put it in the "reserve" to cover his peculations. The origin of this
assumption appears to have been the announcement of the president of
the bank in April that from July, 1930 the "reserve" should be under the
executive control of the manager. There is not a particle of evidence to
support this assumption of defendant's attorneys in the slightest degree.
There is no evidence even remotely tending to show that there was a
shortage in the "reserve". Furthermore, it appears that it would have been
practically impossible for the cashier to substitute P33,000 from the "pico"
for a like amount from the "reserve". In the first place the "reserve" is
ordinarily made up of new bills of the Government of the Philippine
Islands, while the "pico" consists of the ordinary bills in circulation. On
the wrapper of each bundle of bills in the "reserve" appear the initials of
the person who has examined it, while the bundles in the "pico" are held
together only with rubber bonds. It was impossible for the cashier to make
the substitution during the few minutes that he was in the vault Saturday
afternoon and Monday morning. He could not have entered the vault in
the interim without the collusion of the accountant and the manager, as
the combination of the lock on the main door to the vault was known only
to the accountant, and the key to the grill was in a safe, the combination
of which only the manager knew.
After carefully considering the evidence and the decision of the trial court
and the arguments of counsel, we are satisfied that the true explanation
of the disappearance of the money is that the defendant never sent it to
the vault, but concealed it in his cage instead of putting it in the box and
bag, and removed it the next day. The facts inevitably lead the mind to
that conclusion. If the defendant had put the full amount of the "pico" in
the vault Saturday afternoon, it would have been found there Monday
morning. It is a reasonable inference from the facts that the defendant
went to the bank Sunday morning to dispose of the money, and for that
purpose sent the janitor out, to buy ice. The money was taken away from
the bank, and that was the only time when it could have been disposed
of. The defendant may have put it in the flour sack, or he may have put

part of it in the sack and concealed the rest of it on his person, or he may
have passed it out to a confederate. In any event the defendant removed
the money from the bank. Defendant's subsequent conduct strongly tends
to confirm that conclusion. When he left the bank that morning about 11
o'clock, he went to the market and engaged a public carromata to take
his house a basket that he got from a store near the market. A flour sack
and a rice sack similar to those the defendant took away from the bank
were found next day in a laundry bag in defendant's house. About noon
that same day, Sunday, June 8th, the defendant paid a Chinese merchant
P65 in settlement of an old account, and bought a valise for P5. Defendant
did not attempt to explain where this money came from but denied having
any such transactions on June 8th.
Although the question is not specifically raised in the assignments of
error, the court has carefully considered the classification of the crime
committed by the defendant and found it to be correctly classified by the
trial court as qualified theft. The money was in the possession of the
defendant as receiving teller of the bank, and the possession of the
defendant was the possession of the bank. When the defendant, with a
grave abuse of confidence, removed the money and appropriated it to his
own use without the consent of the bank, there was the taking
or apoderamiento contemplated in the definition of the crime of theft.
In the case of the United States vs. De Vera (43 Phil., 1000, 1003),
Justice Villamor speaking for the court said:
The argument advanced in support of the contention of the defense is
that the goods misappropriated were not taken by the accused without
the consent of the owner who had delivered them to her voluntarily, and
this element being lacking, it cannot be the crime of theft.
It is well to remember the essential elements of the crime of theft, as
expounded in the textbooks, which are as follows: First, the taking of
personal property; second, that the property belongs to another; third,
that the taking away be done with intent of gain; fourth, that the taking
away be done without the consent of the owner; and fifth, that the taking
BANKING | Nature of Funds Deposited | 88
away be accomplished without violence or intimidation against persons or
force upon things.
The commentators on the Spanish Penal Code, from which ours was
adopted, lay great stress on the first element, which is the taking away,
that is, getting possession, laying hold of the thing, so that, as Viada says,
if the thing is not taken away, but received and then appropriated or
converted without the consent of the owner, it may be any other crime,
that of estafa for instance, but in no way that of theft, which consists in
the taking away of the thing, that is, in removing it from the place where
it is kept by the legal owner, without the latter's consent, that is, without
obtaining for the purpose the consent of the legitimate owner.
The doctrine of the case as stated in the syllabus is as follows:
When the delivery of a chattel or cattle has not the effect of transferring
the juridical possession thereof, or title thereto, it is presumed that the
possession of, and title to the thing so delivered remains in the owner;
and the act of disposing thereof with intent of gain and without the
consent of the owner constitutes the crime of theft.
The Supreme Court of Spain in a decision of June 23, 1886 held that a
shepherd, who takes away and converts to his own use several head of
the sheep under his care, is guilty of qualified theft. (Viada: Vol. 3, p.
433, 4th ed.)
In a decision of December 30, 1903, the same court said:
Considerando que el grave abuso de confianza se determina por el
quebrantamiento de especiales vinculos de lealtad impuestos, ya por las
relaciones que median entre ofensor y ofendido, o ya por la naturaleza
del encargo que se desempena: y, en tal concepto, el abuso que comete
un mozo de estacion sustrayendo objetos encomendados a la Empresa de
que depende no puede menos de reputarse grave, segun en caso identico
lo ha declarado con anterioridd esta Sala, puesto que el culpable defrauda
la natural confianza que al publico debe inspirar y perjudica, no solo al
credito de dicha Empresa, sino tambien sus intereses, puesto que esta es
 BANKING | Nature of Funds Deposited | 89

responsable de los efectos que se la confian, revistiendo asi el hecho

condiciones de notoria gravedad, etc. (Viada: Vol. 6, p. 308, 5th ed.) See
also the following cases cited on page 314:

El cobrador y comisionado de apremio, nombrado y renumerado por el

respectivo recaudador de contribuciones, que sustrae varios de los
recibos que para el pago de estas existian en la Oficina de recaudacion, y
cobrandolos el mismo de los contribuyentes, se apropia su importe sin
entregarlo en la Oficina, sera responsable del delito de estafa, o del de
hurto con grave abuso de confianza? El Tribunal Supremo ha declarado
que esta ultima y mas grave calificacion es la que le corresponde.

El Concejal de un Ayuntamiento que encargado de la inspeccion y

direccion de una rifa benefica, es soprendido en el acto de sustraer el
dinero que se recaudaba producto de los billetes, sera responsable del
delito de hurto con grave abuso de confianza, o bien del de malversacion
de caudales, y en su defecto, del de estafa? El tribunal Supremo ha
declarado lo primero.

For the foregoing reasons, the decision appealed from is affirmed, with
the costs against the appellant.
 BANKING | Nature of Funds Deposited | 90

QUALIFIED THEFT 1987.5 He concurrently held the position of Branch Operation Officer
beginning in February 1989.6 As such, he was assigned to different
G.R. No. 123183. January 19, 2000 branches until his last detail at the PCIB Luneta Branch in February
1991.7 During cross-examination, he admitted that the Branch Cashier,
PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee, the Commercial Account Officer and the Accountant, were under his direct
vs.
supervision and control.8 Appellant affirmed that he was the primary
RUBEN SISON, Accused-Appellant.
control officer directly responsible for the day to day operations of the
branch,9 including custody of the cash vault.10
DE LEON, JR., J.:

Appellant, in turn, was under the supervision of Helen U. Fargas, Branch

Before us is a petition for review of the Decision1 of the Regional Trial
Manager of the PCIB Luneta Branch.
Court (RTC) of Manila, Branch 35, in Criminal Case No. 92-112851
convicting appellant Ruben Sison of the crime of Qualified Theft under
On April 23, 1992, Fargas, representing PCIB, filed an Affidavit-
Article 310 of the Revised Penal Code. The Information reads:
Complaint11 against appellant in the Office of the City Prosecutor of Manila
for two (2) counts of estafa. She averred that appellant facilitated the
"That in or about and during the period compressed between January 24,
crediting of two (2) fictitious remittances in the amounts of P3,250,000.00
1992 and February 13, 1992, both dates inclusive, in the City of Manila,
and P4,755,000.00 in favor of Solid Realty Development Corporation, an
Philippines, the said accused did then and there willfully, unlawfully and
equally fictitious account, and then later the withdrawal of P6,000,000.00
feloniously, with intent of gain and without the knowledge and consent of
from the PCIB Luneta Branch.
the owner thereof, take, steal and carry away the following, to wit:
On November 18, 1992, the Office of the City Prosecutor of Manila issued
Cash money amounting to P6,000,000.00 in different denominations
a Resolution12 recommending that appellant be charged with qualified
belonging to the PHILIPPINE COMMERCIAL INTERNATIONAL BANK theft, not estafa, considering that as Branch Operation Officer, he had full
(PCIBank for brevity), Luneta Branch, Manila represented by its Branch control of and unimpeded access to the bank vault.
Manager, HELEN U. FARGAS, to the damage and prejudice of the said
On November 20, 1992, the Information against appellant for qualified
owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
theft was filed in the RTC of Manila.
"That in the commission of the said offense, herein accused acted with
On December 17, 1992, the trial court issued a warrant of arrest13 against
grave abuse of confidence and unfaithfulness, he being the Branch
the appellant.
Operation Officer of the said complainant and as such he had free access
to the place where the said amount of money was kept. "Contrary to
Said warrant was returned unserved14 because appellant could no longer
law."2
be found at the address known to PCIB as his place of residence.
Appellant Sison first joined the Auditing Department of the Philippine
On March 31, 1993, the trial court issued another warrant of
Commercial International Bank (PCIB)3 in December 1977.4 He rose from
arrest15 against the appellant.
the ranks and was promoted to the position of Assistant Manager in July

On June 17, 1993, PCIB filed an Urgent Ex-Parte Motion for the Issuance
of Writ of Preliminary Attachment.16 A Supplement17 thereto was filed the
next day. In the afternoon of June 18, 1993, appellant was arrested in
Taguig, Metro Manila.18
He filed a Motion to Post Bail19 which was, however, denied by the trial
court in the Order20 of August 29, 1994.
On June 29, 1993, appellant was arraigned and pleaded not guilty. He
waived his right to pre-trial. Trial began on December 8, 1993 and ended
on October 27, 1994.
The evidence for the prosecution established the following:
Sometime before 1989, Solid Electronics Inc. opened a savings account
in the PCIB Luneta Branch and was issued a passbook with Account No.
0193-37276-2.21
On October 20, 1989, prosecution witness Joji Tan, an accountant of Solid
Electronics Corporation, had the account closed. Thus, the passbook was
accordingly stamped "closed" and was signed "Arlene" referring to the
bank officer who facilitated the accounts closure.22 Said deposit account,
however, was subsequently revived and, renamed as that of Solid Realty
Development Corporation.
Prosecution witness Annabelle Labores, the Branch Accountant of PCIB
Luneta Branch, discovered in her routine quarterly examination of the
alphabetical listing of the accounts of PCIB Luneta Branch clients that
during the first and second quarters of 1991, Account No. 0193-37276-2
was under the account name of Solid Electronics, Inc. However, while no
report was made for the third quarter, she discovered that during the last
quarter, Account No. 0193-37276-2 was already under a different account
name, that is, Solid Realty Development Corporation.23 The change of the
original account name was made without any written request from Solid
Electronics, Inc., the original listed depositor.24
BANKING | Nature of Funds Deposited | 91
Labores further testified that requests for change in account names are
ordinarily referred to Cecil Fante, the Section Head of the Commercial
Account. However, Fante did not have sole access. In fact, appellant
controlled her access since it is he who assigns the computer password to
Fante who can only effectuate a change in the account name after typing
in the correct password. Appellant, thus, can also effectuate change in
the account name of a client by using the password of Fante or his own.
Labores testified that on March 12, 1992, she discovered a discrepancy
between the balance in the Miscellaneous Assets and that in the Sundry
Credit-Miscellaneous Assets for January 21, 1992 in the books of account
of the Luneta Branch of the bank.25 They should bear the same total, but
there was a difference of P8,005,000.00. Labores reported the
discrepancy to appellant.26 Appellant told her that he had already made
the necessary adjustments. Labores traced the source of the
P8,0005,000.00 to two (2) telegraphic fund transfers in the amount of
P3,250,000.00 on January 7, 1992 and P4,755,000.00 on January 13,
199227 purportedly from the PCIB Cabacan Branch in North Cotabato.28
Prosecution witness Mary Joy de Leon, then the Domestic Remittance
Clerk29 of PCIB Luneta Branch, testified that on January 7, 1992, she
processed a telegraphic advice from PCIB Cabacan Branch directing the
crediting of the amount of P3,250,000.00 in the account of Solid Realty
Development Corporation. Each cable advice from a PCIB branch is tested
on a computerized key by the Branch Operation Officer of the receiving
branch to verify its authenticity. Thus, de Leon gave the debit and credit
tickets to appellant Sison who, as Branch Operation Officer of the PCIB
Luneta Branch, had the sole access to the computerized testing
key.30 Thereafter, de Leon made the corresponding entry in the Incoming
Telegraphic Transfer Logbook.31 She also prepared the summary sheet of
the telegraphic transfers which she received on January 7, 1992.32
Prosecution witness Cenen Matias testified that on January 13, 1992 he
was detailed at the Domestic Remittance Department of the PCIB Luneta
Branch to handle telegraphic remittances.33 He received and processed a
cable advice to credit P4,755,000.00 in the account of Solid Realty

Development Corporation.34 He prepared the debit and credit tickets and
turned them over to appellant Sison who approved and signed the same.
Thereafter, he gave the debit ticket to prosecution witness de Leon for
her to include in her summary sheet of the telegraphic transfers received
on January 13, 1992.35
However, prosecution witness Crispin Salvador, Branch Manager of PCIB
Cabacan Branch, North Cotabato, testified that his branch did not send
any telegraphic fund transfer to PCIB Luneta Branch on January 7 and 13,
1992.
Prosecution witness Mario Caballero testified that he was the Branch
Cashier of PCIB Luneta Branch in January 1992.36 As such, he held one of
the only two (2) keys to the cash vault. Appellant held the other
key.37 The cash vault could not be opened without the two (2) keys being
used simultaneously. On January 16, 1992, appellant relieved him from
his post and assigned him to the Accounting Department. Appellant asked
him to surrender his key to the cash vault. He did as he was told. Thus,
beginning on January 16, 1992, appellant now in possession of the two
(2) keys to the cash vault, had unimpeded access thereto.38
Prosecution witness Villar testified that he replaced Caballero and was
designated as acting bank cashier from January 20, 1992 to February 17,
1992;39 and that appellant should have turned over to him one (1) of the
two (2) keys to the cash vault, but he did not. Villar was never given the
key.
Prosecution witness Ma. Gabriela C. Bueno, a Bank Teller of PCIB Luneta
Branch, testified that on January 24, 1992, appellant Sison made a back
office withdrawal in the amount of P3,500,000.00 in behalf of depositor
Solid Realty Development Corporation.40 A back office withdrawal is one
done by a bank officer for a client41 or where the former signs, verifies,
checks and approves the withdrawal slip himself.42 Bueno did not have
enough cash to cover the amount, and so appellant ordered her to
prepare a cash requisition slip.43 Appellant returned the same and asked
her to sign in the box with the heading, "Received" to signify that she
BANKING | Nature of Funds Deposited | 92
processed the transaction.44 The amount of P3,500,000.00 in cash was,
however, actually received in hand by appellant.
Prosecution witness Emily Martinez, another Bank Teller of PCIB Luneta
Branch, gave a testimony similar to that of Bueno. The back office
withdrawal that she processed took place on February 13, 1992 in the
amount of P2,500,000.00 which the appellant received.
Prosecution witness Helen Fargas, PCIB Luneta Branch Manager, testified
that on March 12, 1992, at around 9:30 in the morning, appellant
submitted to her his letter of resignation dated March 10, 1992 effective
a month later. He cited his health and prospective overseas employment
as reasons for his resignation.45 But since then, appellant disappeared
until his arrest on June 15, 1993.
The defense presented appellant as its lone witness. He simply denied
everything. He denied having effected the change in the account name of
Solid Electronics, Inc. to Solid Realty Development Corporation. He belied
knowledge of any telegraphic transfer of funds coming from PCIB Cabacan
Branch. He denied having seen the Summary of Incoming Cables that was
prepared by Mary Joy de Leon for January 7 and 13, 1992. He denied
having made back office withdrawals on January 24 and February 13,
1992.46
Appellant also tried to impute ill-motive to some of the witnesses against
him. According to him, Branch Accountant Annabelle Labores held a
grudge against him because he transferred some of the duties and
responsibilities of the Branch Cashier to her.47
Appellant also tried to shift the blame to other bank officers like Branch
Manager Fargas and Branch Accountant Labores who also had access to
the cash vault.48 He also claimed that not just he as Branch Operations
Officer but also any bank officer who knew a client could facilitate back
office withdrawals.49
However, on cross-examination, appellant admitted that he did authorize
the release on January 24, 1992 and February 13, 1993, of cash in the

amounts of P4,000,000.00 and P2,500,000.00, respectively, from the
vault.50
On June 23, 1995, the trial court rendered judgment convicting appellant
as charged. It ruled:
"The people did not offer any direct evidence that the accused stole and
carried away from the cash vault of the PCI Bank the cash amount of
P6,000,000.00. The proofs adduced by the prosecution are purely
circumstancial. To warrant conviction of an accused based on
circumstancial evidence these requisites must concur: (1) there must be
more than one circumstance; (2) the facts from which the inferences are
derived are proven; and (3) the combination of all the circumstances is
such as to produce a conviction beyond reasonable doubt. (Rule 133, Sec.
4, Revised Rules on Evidence.) The decisive issue then of this case is
centered on whether or not the circumstancial evidence presented by the
people satisfies the prescribed criteria to sustain conviction with moral
certitude.
"Following a hard look at, and lengthy evaluation of, the whole evidence
offered by the prosecution and the defense, the Court is convinced and
satisfied that the chain of circumstances proved by the prosecution with
trustworthy and reliable proofs have [sic] established solid and concrete
facts the collective and combined weight of which produce conviction
beyond reasonable doubt. Let us take these circumstances one after
another.
"The First Circumstance. - Originally Savings Account No. 0193-37276-2
was in the account name of the Solid Electronics, Inc. However, this
account had been dormant and practically closed since October 1989.
(TSN, August 5, 1994, pp. 5 and 9). Without any request from the listed
depositor, the said account was revived and restored to active status
under the same savings account number but under a different account
name, that is, Solid Electronics, Inc. was changed to Solid Realty
Development Corporation. In other words, the account name of Savings
Account No. 0193-37276-2 was altered from Solid Electronics, Inc. to
BANKING | Nature of Funds Deposited | 93
Solid Realty Development Corporation but this account number was
maintained. The alteration was unauthorized. And the only personnel of
the PCI Bank in its Luneta Branch who could have effected the change
were the accused and Cecil Fante, the Section Head of the Commercial
account. Cecil Fante was under the direction and supervision of the
accused.
"However, the Court finds it farfetched and quite remote that it was Cecil
Fante who made the unauthorized alteration of the account name of
Savings Account No. 0193-37276-2, for no evidence was presented that
said personnel had any motive or interest which induced him to act alone
and on his own to modify the account name of said account number from
Solid Electronics, Inc. to Solid Realty Development Corporation.
"On the other hand, it is plausible that the accused conceived the
alteration and deliberately chose the dormant savings account of the Solid
Electronics, Inc. as part of a bigger scheme, because he thought that it
was unlikely that the said client of the PCI Bank would discover the
alteration and sound any protest in case simulated deposits and
withdrawals are transacted in and from its dormant and almost closed
account. Detection of his plot, from the perception of the accused, is
therefore almost impossible.
"The Second Circumstance. On January 7, 1992 and January 13, 1992,
the Luneta Branch of the PCI Bank received two fictitious telegraphic
transfer of funds in the amount of P3,250,000.00 and P4,755,000.00,
respectively, purportedly coming from its Kabacan Branch in North
Cotabato, advising that those remittances should be credited under the
dormant Savings Account No. 0193-37276-2 now in the altered account
name Solid Realty Development Corporation.
"It should be underscored that the logbook of the Kabacan Branch
confirms the testimony of Crispin Salvador that no telegraphic transfer of
funds came from said branch, addressed to the Luneta Branch on January
7, 1992 and January 13, 1992.

"Luneta Branch Manager Helen Fargas, who conducted an investigation
about the supposed telegraphic remittances of funds from the Kabacan
Branch corroborated the testimony of Crispin Salvador. (TSN, December
8, 1993, pp. 14-16)
"In short, the two telegraphic transfers of funds purportedly coming from
the Kabacan Branch being fictitious, the amount of P8,005,000.00
supposedly covered by, and remitted under, those telegraphic transfers
were not in fact received in the Luneta Branch.
"The question now is, who masterminded those fake remittances of funds.
This brings us to the third circumstance which reveals the identity of the
author of the fictitious remittances.
"The Third Circumstance. The two fictitious telegraphic transfers received
in the Luneta Branch of the PCI Bank were tested, approved and encoded
by the accused, and the amounts of P3,250,000.00 and P4,755,000.00
respectively covered by those telegraphic transfers were credited to
Savings Account No. 0193-37276-2 with the account name Solid Realty
Development Corporation.
"The facts established under the third circumstance clearly and
undoubtedly pointed to the accused as the author of the two fictitious
telegraphic transfers. As the court has demonstrated under the first
circumstance, he revived the long dormant and almost closed account of
the Solid Realty Development Corporation. Then following receipts of
those fake remittances of funds in the Luneta Branch of the PCI Bank, he
tested, approved and encoded them in the micro-general ledger, and
credited them to the revived account now under the account name of
Solid Realty Development Corporation.
"The Fourth Circumstance. - The accused chose the Kabacan Branch of
the PCI Bank in North Cotabato as the ostensive origin of the simulated
telegraphic transfers because he thought his original design would not be
detected and exposed in view of the absence of direct lines of
communication between that Branch and the Luneta Branch to verify and
confirm the spurious telegraphic remittances.
BANKING | Nature of Funds Deposited | 94
"The Fifth Circumstance. The cash vault has two different keys. The
accused, as the Branch Operation Officer, had custody of one of them,
while the other key was entrusted to the possession of Mario Caballero,
as Branch Cashier at the time. To open the cash vault the two keys must
be used simultaneously. One without the other cannot open the cash
vault.
"However, on January 16, 1992, the accused relieved Mario Caballero of
his duties as Branch Cashier and assigned him to the Accounting
Department, where he stayed up to February 16, 1992, on account of
alleged but unspecified backlogs in the said Department. Upon instruction
of the accused, Mario Caballero turned over his key to the cash vault to
the former. From that date said accused had exclusive and absolute
access and control of the cash vault. Although he designated Prudencio
Villar as Acting Branch Cashier vice Mario Caballero, he (accused) did not
turn over the cashier’s key to the cash vault to Prudencio Villar.
"The defense did not offer any satisfactory explanation why Prudencio
Villar, who belonged to the pool of employees without regular assignment,
was not the one assigned by the accused to the Accounting Department
to augment the personnel therein to update the alleged backlogs in that
Department. The defense has not adduced any satisfactory explanation
why Mario Caballero was the one relieved of his highly delicate
responsibilities as Branch Cashier, and was replaced by someone from the
reserved pool who may be as trustworthy and qualified to discharge the
cashiers duties and functions. The plot was too obvious.
"The Sixth Circumstance. - On January 24, 1992, and on February 13,
1992, acting beyond the scope of his authority, without the knowledge
and consent of his employer, and through the process of simulated back
office withdrawals, the accused withdrew from the cash vault of the PCI
Bank in its Luneta Branch the amount of P3,500,000.00 and
P2,500,000.00, respectively, using the passbook of the revived dormant
account under the name of the Solid Realty Development Corporation.

"Unfortunately, the bank documents and papers supporting and proving
those withdrawals made by the accused, like the withdrawal slips, the
cash requisition slips, the tellers blotter, the credit and debit tickets, the
cable advices from the Kabacan Branch, the IOA (inter-office advices),
pages 193 to 196 of the incoming telegraphic logbook of the Luneta
Branch of PCI Bank (Exhibit N) for January 7 and 13, 1992, having [sic]
mysteriously disappeared from the filing cabinets and places where they
were usually kept. (TSN, December 12, 1993, pp. 25 and 46; TSN,
January 7, 1994, pp. 25, 71-72; TSN, January 17, 1994, p. 21; January
24, 1994, pp. 21-22, 36-37, 39 and 42). The evidence discloses that the
accused had access to those places where the missing bank documents
and papers were regularly kept. (TSN, January 24, 1994, pp. 12 and 24).
"The Seventh and Last Circumstance. The ultimate factor which
demonstrates the guilt of the accused was his unjustified flight.
"On March 12, 1992, about 9:30 oclock in the morning, the accused
unexpectedly submitted his resignation letter (Exhibit R), which he dated
March 10, 1992, to Branch Manager Helen Fargas, after which he left his
office and was not heard of since then until he was arrested on June 15,
1993 (Exhibit JJ), although as clearly stated in his said letter of
resignation his demision [sic] would yet take effect on April 10, 1992.
"The timing of his resignation was quite significant and revealing. He
resigned when he sensed that Branch Accountant Annabelle Labores was
about to conclude her examination of the books of account of the PCI
Bank in its Luneta Branch, which he knew would uncover his irregular and
anomalous transactions and withdrawals of funds from the cash vaults of
the Bank, which, through his manipulation, came under his exclusive and
complete control.
"The flight of the accused is further magnified by his omission to take the
steps which would entitled him to claim the substantial benefits that
accrued to him on account of his long service to the PCI Bank dating as
far back as December 1977. (TSN, October 27, 1994, pp. 4-11, 48-49,
52-53.) He did not bother to make the proper turn over of his key to the
BANKING | Nature of Funds Deposited | 95
cash vault and the papers and documents of the Bank under his custody
to his successor, as well as the properties and equipment of his employer
under his responsibility, and to secure the corresponding clearance to
relieve him of his accountabilities.
"The claim of the accused that his sudden resignation was brought about
by the threats on his life by a certain cousin of his second wife on account
of domestic problems, does not merit judicial belief.
"Without satisfactory explanation, flight is a clear and positive evidence
of guilt. xxx It is a well-entrenched doctrine that the flight of an accused
and his act of hiding until he was arrested are circumstances highly
indicative of guilt, for as has long been wisely said, the wicked flees even
when no man pursueth, but the righteous is as bold as a lion.
"The unconfirmed denials and explanations of the accused cannot turn
the scale in his favor and outweigh the positive, categorical and
convincing testimonies of the witnesses of the people to the contrary,
which the court finds trustworthy, reliable and overwhelming. The
witnesses of the prosecution are responsible officers and personnel of the
PCI Bank. They were his officemates and all them, except Branch Manager
Helen Fargas, Branch Manager Crispin Salvador of Cabacan Branch, and
Joji Tan, were his subordinates. All of them do not appear interested and
concerned in whatever final outcome this case may have. No evidence
was adduced by the defense disclosing that any of them was seriously ill-
motivated in testifying against the accused. The claim of the accused that
because he was strict in his dealing with his subordinates, thus his official
relations with them were not good, apart from being speculative and
uncorroborated, was not sufficient to provide them with the motivation of
charging him falsely with a crime of serious as qualified theft which, if
found true, could cost him many long years in prison.
"Moreover, in view of the seriousness of the charge and the amount
involved, the Court had meticulously observed and monitored the
demeanors of the prosecution witnesses while giving their narration on
the witness chair. However, it observed none of the badges of deliberate

falsehood. Each of them delivered their narration, full of details, in a
straight forward and natural manner, without any stumbling. More than
this, they were subjected to searching and tedious cross-examination by
a determined, competent and experienced defense counsel de parte, such
that any fabrication in their versions could have been easily detected and
exposed. Nonetheless, no material part of their testimonies has been
disproved and shown as concocted.
"The absence of any indication, therefore, in the evidence of the People
disclosing that its witnesses have been actuated by improper motive in
testifying against the accused in the manner they did strongly supports
the conclusion that no such improper motive existed and that their open
court narrations are worthy of full faith and credit. xxx
"In resume, the Court finds its mind at ease and with moral certitude that
the collective and combined weight of the unbroken chain of hard and
solid facts, indubitably established by trustworthy and reliable evidence
offered by the People, unerringly and inevitably point [sic] to but one
natural and rational conclusion; the accused, and no one else, committed
the crime at bench. His irregular and anomalous acts and transactions
discussed earlier in all details conclusively demonstrate his well
premeditated and laid out plot to steal and walk off from the cash vault
of the bank, and leave no room for doubt about his guilt. His key position
in the Luneta Branch of the PCI Bank gave him complete and unhampered
liberty to reach the Banks records, papers and files. His senior position in
the Bank provided him with authority to control its computer system, for
he alone had the power to assign the passwords to operate the computer
machines of the Bank. Taking advantage of his top position in the Luneta
Branch of the PCI Bank, he cunningly mapped out a maneuver which
placed him in complete, exclusive and direct control of, and access to, the
cash vault of the Bank. By his sly moves and manipulations, he acquires
[sic] the opportunity to steal and appropriate the amount of
P6,000,000.00 from the cash vault. And when he sensed that his crime
was about to be exposed, he unexpectedly resigned on March 12, 1992,
and forthwith went into an unauthorized leave of absence and fled,
although his resignation would yet take effect on April 10, 1992. Since
BANKING | Nature of Funds Deposited | 96
then he had been in hiding and had not been heard of until he was
arrested on June 15, 1993 by virtue of a warrant of arrest issued by this
court.
"The crime committed by the accused is qualified theft, defined and
penalized under Article 310 of the Revised Penal Code. As has been
synthesized above, his key position in the PCI Bank being its operations
officer in the Luneta Branch create [sic] a relation of dependence between
him and his employer. Such relation in turn established a high degree of
trust and confidence in him by the Bank, which he gravely abused when,
taking advantage of his position and with intent to gain, he took from the
cash vault, carried away and appropriated the aggregate cash amount of
P6,000,000.00, without the knowledge and consent of his employer and
to its damage and prejudice.
"The situation of the accused is not far removed from that of a bank
receiving teller who was adjudged guilty of qualified theft when he, taking
advantage of his position, appropriated the money of the bank in his
possession. The Supreme Court held that there was grave abuse of
confidence, because as receiving teller, his possession of the money was
the possession of the bank, as he had only the physical, not juridical,
possession of the amount. xxx In the case under consideration, the
possession of the accused of the money kept in the cash vault was the
possession of the PCI Bank. He had only physical, not juridical, possession
of the cash money kept in said vault."
The trial court meted out the following penalty:
"WHEREFORE, judgment is rendered pronouncing accused RUBEN SISON
guilty beyond reasonable doubt of QUALIFIED THEFT defined and
penalized under Article 310 in relation to paragraph 1 of Article 309, of
the Revised Penal Code, and sentencing him to RECLUSION PERPETUA
together with the accessory penalties provided by law.
"Said accused is ordered to pay the Philippine Commercial Industrial Bank
the sum of P6,000,000.00 as reparation of the damages he caused to said
private offended party.

"With costs against the accused."
On June 30, 1995, appellant filed his Notice of Appeal.
Appellant raises the following assignment of errors in his Brief:
I........THAT THE TRIAL COURT ERRED IN CONVICTING THE ACCUSED-
APPELLANT AS THERE HAD BEEN NO DIRECT EVIDENCE PROVING THE
COMMISSION OF THE OFFENSE BY THE ACCUSED-APPELLANT AND THE
TRIAL COURT RELIED SOLELY ON QUESTIONABLE CIRCUMSTANTIAL
EVIDENCE;
II........THAT THE PROSECUTION FAILED TO PROVE THE GUILT OF THE
ACCUSED-APPELLANT BEYOND REASONABLE DOUBT.
The appeal has no merit. The trial court correctly convicted appellant of
Qualified Theft on the basis of circumstantial evidence.
Appellant principally argues that the People did not offer any direct
evidence that he stole and carried away from the cash vault of PCIB
Luneta Branch the amount of six million pesos (P6,000,000.00), but only
managed to present circumstantial evidence which did not allegedly prove
his guilt beyond reasonable doubt. In his Brief, appellant principally
contends that there was no evidence of his complicity in the performance
of the act without which the crime could not have been consummated,
namely, the changing of the account name of the depositor, that is, from
Solid Electronics Inc. to Solid Realty Development Corporation.
This Court disagrees with the appellant.
Circumstantial evidence is not a "weaker" form of evidence vis--vis direct
evidence.51 The Rules of Court do not distinguish between direct evidence
and evidence of circumstances insofar as their probative value is
concerned. No greater degree of certainty is required when the evidence
is circumstantial than when it is direct, for in either case, the trier of fact
must be convinced beyond a reasonable doubt as to the guilt of the
accused.52
BANKING | Nature of Funds Deposited | 97
Under Section 4, Rule 133 of the Revised Rules of Court, circumstantial
evidence is sufficient for conviction if there is more than one
circumstance, the facts from which the inference is derived, are proven,
and the combination of all the circumstances produces moral certainty as
to convict beyond a reasonable doubt.
There is no denying that the following facts were proven by the
prosecution:
1. that appellant had access and solely controlled the access of Cecil
Fante, to the computer system for changing account names of clients;
2. that appellant solely controlled access to the computerized testing key
for telegraphic fund transfers;
3. that Solid Electronics, Inc. is not the same entity as Solid Realty
Development Corporation;
4. that Solid Electronics, Inc. closed its saving account with PCIB Luneta
Branch;
5. that Solid Realty Development Corporation does not exist and never
itself opened a savings account with PCIB Luneta Branch;
6. that appellant made two (2) back office withdrawals in the aggregate
amount of P6,000,000.00 in behalf of Solid Realty Development
Corporation;
7. that appellant solely controlled the access to the cash vault;
8. that the (2) telegraphic fund transfers from the PCIB Cabacan Branch
in the aggregate amount of P8,005,000.00 were fictitious, and
9. that appellant disappeared immediately after he tendered his
resignation letter which was to be effective still a month later and without
claiming from his employer the remaining monetary benefits due him.

We infer from these facts, considered together and in relation to each
other, that appellant, not Cecil Fante, changed the account name for
Savings Account No. 0193-37276-2 from Solid Electronics, Inc. to Solid
Realty Development Corporation because it was appellant and not Cecil
Fante, who was in a position to clear and approve the two (2) fictitious
telegraphic fund transfers to the account of Solid Realty Development
Corporation purportedly from the PCIB Cabacan Branch; and that it was
appellant and not Cecil Fante, who made the back office withdrawals in
behalf of Solid Realty Development Corporation. As it was admitted by
appellant that he did make such back office withdrawals in behalf of Solid
Realty Development Corporation which was proven to be a non-existent
entity, there is no denying that no officer or representative of said
corporation could have instructed him to make such withdrawals. He
merely pretended to be acting upon instruction of Solid Realty
Development Corporation in withdrawing P6,000,000.00 allegedly for said
corporation when in truth there was no such corporation. Ultimately, the
combination of all the incriminating facts proven by the prosecution and
the logical inferences derived therefrom leave no doubt in Our mind that
appellant, with grave abuse of confidence, conceived and accomplished
the theft of P6,000,000.00 from the PCIB Luneta Branch.
Articles 308 and 310, respectively of the Revised Penal Code provides:
"Who are liable for theft. Theft is committed by any person who, with
intent to gain but without violence against or intimidation of persons nor
force upon things, shall take personal property of another without the
latter’s consent."
"Qualified Theft. The crime of theft shall be punished by the penalties next
higher by two degrees than those respectively specified in the next
preceding article, if committed by a domestic servant, or with grave abuse
of confidence, or if the property stolen is motor vehicle, mail matter or
large cattle or consists of coconuts taken from the premises of a
plantation, fish taken from a fishpond or fishery or if property is taken on
the occasion of fire, earthquake, typhoon, volcanic eruption, or any other
calamity, vehicular accident or civil disturbance.
BANKING | Nature of Funds Deposited | 98
Under Article 308 of the said Code, the elements of the crime of theft are:
1. that there be taking of personal property;
2. that said property belongs to another;
3. that the taking be done with intent to gain;
4. that the taking be done without the consent of the owner; and
5. that the taking be accomplished without the use of violence against or
intimidation of persons or force upon things.53cräläwvirtualibräry
Theft becomes qualified when any of the following circumstances is
present:
1. the theft is committed by a domestic servant;
2. the theft is committed with grave abuse of confidence;
3. the property stolen is a (a) motor vehicle, (b) mail matter or (c) large
cattle;
4. the property stolen consists of coconuts taken from the premises of a
plantation;
5. the property stolen is fish taken from a fishpond or fishery; and
6. the property was taken on the occasion of fire, earthquake, typhoon,
volcanic eruption, or any other calamity, vehicular accident or civil
disturbance.54
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is qualified theft. Appellant could
not have committed the crime had he not been holding the position of
Luneta Branch Operation Officer which gave him not only sole access to
the bank vault but also control of the access of all bank employees in that
branch, except the Branch Manager, to confidential and highly delicate
 BANKING | Nature of Funds Deposited | 99

computerized security systems designed to safeguard, among others, the

integrity of telegraphic fund transfers and account names of bank clients.
The management of the PCIB reposed its trust and confidence in the
appellant as its Luneta Branch Operation Officer, and it was this trust and
confidence which he exploited to enrich himself to the damage and
prejudice of PCIB in the amount of P6,000,000.00.

In view of all the foregoing, we find no reversible error in the appealed

Decision.

WHEREFORE, the instant appeal is hereby DISMISSED, and the Decision

dated June 23, 1995, of the Regional Trial Court of Manila, Branch 35, in
Criminal Case No. 92-112851, is hereby AFFIRMED.

Costs against appellant.

SO ORDERED.

SET-OFF
G.R. No. L-43191 November 13, 1935
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First
Instance of Cebu, which sentenced the defendant to return to the account
of the plaintiff the sum of P5098, with legal interest and costs, the plaintiff
to secure damages in the amount of P10,000 more or less, and the
defendant to be absolved totally from the amended complaint. As it is
conceded that the plaintiff has already received the sum represented by
the United States treasury, warrant, which is in question, the appeal will
thus determine the amount, if any, which should be paid to the plaintiff
by the defendant.
The parties to the case are Paulino Gullas and the Philippine National
Bank. The first named is a member of the Philippine Bar, resident in the
City of Cebu. The second named is a banking corporation with a branch
in the same city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the
United States for the United States Veterans Bureau issued a Warrant in
the amount of $361, payable to the order of Francisco Sabectoria Bacos.
Paulino Gullas and Pedro Lopez signed as endorsers of this check.
Thereupon it was cashed by the Philippine National Bank. Subsequently
the treasury warrant was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of
the bank was P509. Against this balance he had issued certain cheeks
which could not be paid when the money was sequestered by the On
August 20, 1933, Attorney Gullas left his residence for Manila.
BANKING | Nature of Funds Deposited | 100
The bank on learning of the dishonor of the treasury warrant sent notices
by mail to Mr. Gullas which could not be delivered to him at that time
because he was in Manila. In the bank's letter of August 21, 1933,
addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed
that the United States Treasury warrant No. 20175 in the name of
Francisco Sabectoria Bacos for $361 or P722, the payment for which had
been received has been returned by our Manila office with the notation
that the payment of his check has been stopped by the Insular Treasurer.
"In view of this therefore we have applied the outstanding balances of
your current accounts with us to the part payment of the foregoing
check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas
to Cebu on August 31, 1933, notice of dishonor was received and the
unpaid balance of the United States Treasury warrant was immediately
paid by him.
As a consequence of these happenings, two occurrences transpired which
inconvenienced Attorney Gullas. In the first place, as above indicated,
checks including one for his insurance were not paid because of the lack
of funds standing to his credit in the bank. In the second place, periodicals
in the vicinity gave prominence to the news to the great mortification of
Gullas.
A variety of incidental questions have been suggested on the record which
it can be taken for granted as having been adversely disposed of in this
opinion. The main issues are two, namely, (1) as to the right of Philippine
National Bank, and to apply a deposit to the debt of depositor to the bank
and (2) as to the amount damages, if any, which should be awarded
Gullas.
The Civil Code contains provisions regarding compensation (set off) and
deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law
provide that compensation shall take place when two persons are
reciprocally creditor and debtor of each other (Civil Code, article 1195).
In his connection, it has been held that the relation existing between a
depositor and a bank is that of creditor and debtor. (Fulton Iron Works
Co. vs. China Banking Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the
liability of a general indorser and giving the procedure for a notice of
dishonor. The general indorser of negotiable instrument engages that if
he be dishonored and the, necessary proceedings of dishonor be duly
taken, he will pay the amount thereof to the holder. (Negotiable
Instruments Law, sec. 66.) In this connection, it has been held a long line
of authorities that notice of dishonor is in order to charge all indorser and
that the right of action against him does not accrue until the notice is
given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5
Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands
for the payment of any indebtedness to it on the part of a depositor. In
Louisiana, however, a civil law jurisdiction, the rule is denied, and it is
held that a bank has no right, without an order from or special assent of
the depositor to retain out of his deposit an amount sufficient to meet his
indebtedness. The basis of the Louisiana doctrine is the theory of
confidential contracts arising from irregular deposits, e. g., the deposit of
money with a banker. With freedom of selection and after full preference
to the minority rule as more in harmony with modern banking practice.
(1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union
Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated,
arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604;
8 Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11
Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next
consider if that remedy was enforced properly. The fact we believe is
undeniable that prior to the mailing of notice of dishonor, and without
waiting for any action by Gullas, the bank made use of the money
standing in his account to make good for the treasury warrant. At this
point recall that Gullas was merely an indorser and had issued in good
faith.
BANKING | Nature of Funds Deposited | 101
As to a depositor who has funds sufficient to meet payment of a check
drawn by him in favor of a third party, it has been held that he has a right
of action against the bank for its refusal to pay such a check in the
absence of notice to him that the bank has applied the funds so deposited
in extinguishment of past due claims held against him. (Callahan vs. Bank
of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the
minority doctrine, for on principle it would seem that notice is not
necessary to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor. However this may be, as to an
indorser the situation is different, and notice should actually have been
given him in order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas. But to follow up that statement with others proving
exact damages is not so easy. For instance, for alleged libelous articles
the bank would not be primarily liable. The same remark could be made
relative to the loss of business which Gullas claims but which could not be
traced definitely to this occurrence. Also Gullas having eventually been
reimbursed lost little through the actual levy by the bank on his funds.
On the other hand, it was not agreeable for one to draw checks in all good
faith, then, leave for Manila, and on return find that those checks had not
been cashed because of the action taken by the bank. That caused a
disturbance in Gullas' finances, especially with reference to his insurance,
which was injurious to him. All facts and circumstances considered, we
are of the opinion that Gullas should be awarded nominal damages
because of the premature action of the bank against which Gullas had no
means of protection, and have finally determined that the amount should
be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the
main be overruled, with the result that the judgment of the trial court will
be modified by sentencing the defendant to pay the plaintiff the sum of
P250, and the costs of both instances.

SET-OFF
G.R. No. 127469 January 15, 2004
PHILIPPINE BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and LEONILO MARCOS, respondents.
CARPIO, J.:
The Case
Before us is a petition for review of the Decision 1 of the Court of Appeals
in CA-G.R. CV No. 34382 dated 10 December 1996 modifying the
Decision2 of the Regional Trial Court, Fourth Judicial Region, Assisting
Court, Biñan, Laguna in Civil Case No. B-3148 entitled "Leonilo Marcos v.
Philippine Banking Corporation."
The Antecedent Facts
On 30 August 1989, Leonilo Marcos ("Marcos") filed with the trial court a
Complaint for Sum of Money with Damages3 against petitioner Philippine
Banking Corporation ("BANK").4
Marcos alleged that sometime in 1982, the BANK through Florencio B.
Pagsaligan ("Pagsaligan"), one of the officials of the BANK and a close
friend of Marcos, persuaded him to deposit money with the BANK. Marcos
yielded to Pagsaligan’s persuasion and claimed he made a time deposit
with the BANK on two occasions. The first was on 11 March 1982
for P664,897.67. The BANK issued Receipt No. 635734 for this time
deposit. On 12 March 1982, Marcos claimed he again made a time deposit
with the BANK for P764,897.67. The BANK did not issue an official receipt
for this time deposit but it acknowledged a deposit of this amount through
a letter-certification Pagsaligan issued. The time deposits earned interest
at 17% per annum and had a maturity period of 90 days.
Marcos alleged that Pagsaligan kept the various time deposit certificates
on the assurance that the BANK would take care of the certificates,
BANKING | Nature of Funds Deposited | 102
interests and renewals. Marcos claimed that from the time of the deposit,
he had not received the principal amount or its interest.
Sometime in March 1983, Marcos wanted to withdraw from the BANK his
time deposits and the accumulated interests to buy materials for his
construction business. However, the BANK through Pagsaligan convinced
Marcos to keep his time deposits intact and instead to open several
domestic letters of credit. The BANK required Marcos to give a marginal
deposit of 30% of the total amount of the letters of credit. The time
deposits of Marcos would secure 70% of the letters of credit. Since Marcos
trusted the BANK and Pagsaligan, he signed blank printed forms of the
application for the domestic letters of credit, trust receipt agreements and
promissory notes.
Marcos executed three Trust Receipt Agreements totalling P851,250,
broken down as follows: (1) Trust Receipt No. CD 83.7 dated 8 March
1983 for P300,000; (2) Trust Receipt No. CD 83.9 dated 15 March 1983
for P300,000; and (3) Trust Receipt No. CD 83.10 dated 15 March 1983
for P251,250. Marcos deposited the required 30% marginal deposit for
the trust receipt agreements. Marcos claimed that his obligation to the
BANK was therefore only P595,875 representing 70% of the letters of
credit.
Marcos believed that he and the BANK became creditors and debtors of
each other. Marcos expected the BANK to offset automatically a portion
of his time deposits and the accumulated interest with the amount
covered by the three trust receipts totalling P851,250 less the 30%
marginal deposit that he had paid. Marcos argued that if only the BANK
applied his time deposits and the accumulated interest to his remaining
obligation, which is 70% of the total amount of the letters of credit, he
would have paid completely his debt. Marcos further pointed out that
since he did not apply for a renewal of the trust receipt agreements, the
BANK had no right to renew the same.
Marcos accused the BANK of unjustly demanding payment for the total
amount of the trust receipt agreements without deducting the 30%

marginal deposit that he had already made. He decried the BANK’s
unlawful charging of accumulated interest because he claimed there was
no agreement as to the payment of interest. The interest arose from
numerous alleged extensions and penalties. Marcos reiterated that there
was no agreement to this effect because his time deposits served as the
collateral for his remaining obligation.
Marcos also denied that he obtained another loan from the BANK
for P500,000 with interest at 25% per annum supposedly covered by
Promissory Note No. 20-979-83 dated 24 October 1983. Marcos bewailed
the BANK’s belated claim that his time deposits were applied to this void
promissory note on 12 March 1985.
In sum, Marcos claimed that:
(1) his time deposit with the BANK "in the total sum
of P1,428,795.345 has earned accumulated interest since March 1982 up
to the present in the total amount of P1,727,305.45 at the rate of
17% per annum so his total money with defendant (the BANK)
is P3,156,100.79 less the amount of P595,875 representing the 70%
balance of the marginal deposit and/or balance of the trust agreements;"
and
(2) his indebtedness was only P851,250 less the 30% paid as marginal
deposit or a balance of P595,875, which the BANK should have
automatically deducted from his time deposits and accumulated interest,
leaving the BANK’s indebtedness to him at P2,560,025.79.
Marcos prayed the trial court to declare Promissory Note No. 20-979-83
void and to order the BANK to pay the amount of his time deposits with
interest. He also sought the award of moral and exemplary damages as
well as attorney’s fees for P200,000 plus 25% of the amount due.
On 18 September 1989, summons and a copy of the complaint were
served on the BANK.6
BANKING | Nature of Funds Deposited | 103
On 9 October 1989, the BANK filed its Answer with Counterclaim. The
BANK denied the allegations in the complaint. The BANK believed that the
suit was Marcos’ desperate attempt to avoid liability under several trust
receipt agreements that were the subject of a criminal complaint.
The BANK alleged that as of 12 March 1982, the total amount of the
various time deposits of Marcos was only P764,897.67 and
not P1,428,795.357 as alleged in the complaint. The P764,897.67
included the P664,897.67 that Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to the BANK the time deposit
certificates by virtue of the Deed of Assignment dated 2 June 1989.
Marcos executed the Deed of Assignment to secure his various loan
obligations. The BANK claimed that these loans are covered by Promissory
Note No. 20-756-82 dated 2 June 1982 for P420,000 and Promissory Note
No. 20-979-83 dated 24 October 1983 for P500,000. The BANK stressed
that these obligations are separate and distinct from the trust receipt
agreements.
When Marcos defaulted in the payment of Promissory Note No. 20-979-
83, the BANK debited his time deposits and applied the same to the
obligation that is now considered fully paid.8 The BANK insisted that the
Deed of Assignment authorized it to apply the time deposits in payment
of Promissory Note No. 20-979-83.
In March 1982, the wife of Marcos, Consolacion Marcos, sought the advice
of Pagsaligan. Consolacion informed Pagsaligan that she and her husband
needed to finance the purchase of construction materials for their
business, L.A. Marcos Construction Company. Pagsaligan suggested the
opening of the letters of credit and the execution of trust receipts,
whereby the BANK would agree to purchase the goods needed by the
client through the letters of credit. The BANK would then entrust the
goods to the client, as entrustee, who would undertake to deliver the
proceeds of the sale or the goods themselves to the entrustor within a
specified time.

The BANK claimed that Marcos freely entered into the trust receipt
agreements. When Marcos failed to account for the goods delivered or for
the proceeds of the sale, the BANK filed a complaint for violation of
Presidential Decree No. 115 or the Trust Receipts Law. Instead of
initiating negotiations for the settlement of the account, Marcos filed this
suit.
The BANK denied falsifying Promissory Note No. 20-979-83. The BANK
claimed that the promissory note is supported by documentary evidence
such as Marcos’ application for this loan and the microfilm of the cashier’s
check issued for the loan. The BANK insisted that Marcos could not deny
the agreement for the payment of interest and penalties under the trust
receipt agreements. The BANK prayed for the dismissal of the complaint,
payment of damages, attorney’s fees and cost of suit.
On 15 December 1989, the trial court on motion of Marcos’ counsel issued
an order declaring the BANK in default for filing its answer five days after
the 15-day period to file the answer had lapsed.9 The trial court also held
that the answer is a mere scrap of paper because a copy was not furnished
to Marcos. In the same order, the trial court allowed Marcos to present
his evidence ex parte on 18 December 1989. On that date, Marcos
testified and presented documentary evidence. The case was then
submitted for decision.
On 19 December 1989, Marcos received a copy of the BANK’s Answer with
Compulsory Counterclaim.
On 29 December 1989, the BANK filed an opposition to Marcos’ motion to
declare the BANK in default. On 9 January 1990, the BANK filed a motion
to lift the order of default claiming that it had only then learned of the
order of default. The BANK explained that its delayed filing of the Answer
with Counterclaim and failure to serve a copy of the answer on Marcos
was due to excusable negligence. The BANK asked the trial court to set
aside the order of default because it had a valid and meritorious defense.
On 7 February 1990, the trial court issued an order setting aside the
default order and admitting the BANK’s Answer with Compulsory
BANKING | Nature of Funds Deposited | 104
Counterclaim. The trial court ordered the BANK to present its evidence on
12 March 1990.
On 5 March 1990, the BANK filed a motion praying to cross-examine
Marcos who had testified during the ex-parte hearing of 18 December
1989. On 12 March 1990, the trial court denied the BANK’s motion and
directed the BANK to present its evidence. Trial then ensued.
The BANK presented two witnesses, Rodolfo Sales, the Branch Manager
of the BANK’s Cubao Branch since 1987, and Pagsaligan, the Branch
Manager of the same branch from 1982 to 1986.
On 24 April 1990, the counsel of Marcos cross-examined Pagsaligan. Due
to lack of material time, the trial court reset the continuation of the cross-
examination and presentation of other evidence. The succeeding hearings
were postponed, specifically on 24, 27 and 28 of August 1990, because
of the BANK’s failure to produce its witness, Pagsaligan. The BANK on
these scheduled hearings also failed to present other evidence.
On 7 September 1990, the BANK moved to postpone the hearing on the
ground that Pagsaligan could not attend the hearing because of illness.
The trial court denied the motion to postpone and on motion of Marcos’
counsel ruled that the BANK had waived its right to present further
evidence. The trial court considered the case submitted for decision. The
BANK moved for reconsideration, which the trial court denied.
On 8 October 1990, the trial court rendered its decision in favor of Marcos.
Aggrieved, the BANK appealed to the Court of Appeals.
On 10 December 1996, the Court of Appeals modified the decision of the
trial court by reducing the amount of actual damages and deleting the
attorney’s fees awarded to Marcos.
The Ruling of the Trial Court
The trial court ruled that the total amount of time deposits of Marcos
was P1,429,795.34 and not only P764,897.67 as claimed by the BANK.

The trial court found that Marcos made a time deposit on two occasions.
The first time deposit was made on 11 March 1982 for P664,897.67 as
shown by Receipt No. 635743. On 12 March 1982, Marcos again made a
time deposit for P764,897.67 as acknowledged by Pagsaligan in a letter
of certification. The two time deposits thus amounted to P1,429,795.34.
The trial court pointed out that no receipt was issued for the 12 March
1982 time deposit because the letter of certification was sufficient. The
trial court made a finding that the certification letter did not include the
time deposit made on 11 March 1982. The 12 March 1982 deposit was in
cash while the 11 March 1982 deposit was in checks which still had to
clear. The checks were not included in the certification letter since the
BANK could not credit the amounts of the checks prior to clearing. The
trial court declared that even the Deed of Assignment acknowledged that
Marcos made several time deposits as the Deed stated that the assigment
was charged against "various" time deposits.
The trial court recognized the existence of the Deed of Assignment and
the two loans that Marcos supposedly obtained from the BANK on 28 May
1982 for P340,000 and on 2 June 1982 for P420,000. The two loans
amounted to P760,000. On 2 June 1982, the same day that he secured
the second loan, Marcos executed a Deed of Assignment assigning to the
BANK P760,000 of his time deposits. The trial court concluded that
obviously the two loans were immediately paid by virtue of the Deed of
Assignment.
The trial court found it strange that Marcos borrowed money from the
BANK at a higher rate of interest instead of just withdrawing his time
deposits. The trial court saw no rhyme or reason why Marcos had to
secure the loans from the BANK. The trial court was convinced that Marcos
did not know that what he had signed were loan applications and a Deed
of Assignment in payment for his loans. Nonetheless, the trial court
recognized "the said loan of P760,000 and its corresponding payment by
virtue of the Deed of Assignment for the equal sum."10
BANKING | Nature of Funds Deposited | 105
If the BANK’s claim is true that the time deposits of Marcos amounted
only to P764,897.67 and he had already assigned P760,000 of this
amount, the trial court pointed out that what would be left as of 3 June
1982 would only be P4,867.67.11 Yet, after the time deposits had
matured, the BANK allowed Marcos to open letters of credit three times.
The three letters of credit were all secured by the time deposits of Marcos
after he had paid the 30% marginal deposit. The trial court opined that if
Marcos’ time deposit was only P764,897.67, then the letters of credit
totalling P595,875 (less 30% marginal deposit) was guaranteed by
only P4,867.67,12 the remaining time deposits after Marcos had executed
the Deed of Assignment for P760,000.
According to the trial court, a security of only P4,867.6713 for a loan
worth P595,875 (less 30% marginal deposit) is not only preposterous, it
is also comical. Worse, aside from allowing Marcos to have unsecured
trust receipts, the BANK still claimed to have granted Marcos another loan
for P500,000 on 25 October 1983 covered by Promissory Note No. 20-
979-83. The BANK is a commercial bank engaged in the business of
lending money. Allowing a loan of more than a million pesos without
collateral is in the words of the trial court, "an impossibility and a gross
violation of Central Bank Rules and Regulations, which no Bank Manager
has such authority to grant."14 Thus, the trial court held that the BANK
could not have granted Marcos the loan covered by Promissory Note No.
20-979-83 because it was unsecured by any collateral.
The trial court required the BANK to produce the original copies of the
loan application and Promissory Note No. 20-979-83 so that it could
determine who applied for this loan. However, the BANK presented to the
trial court only the "machine copies of the duplicate" of these documents.
Based on the "machine copies of the duplicate" of the two documents, the
trial court noticed the following discrepancies: (1) Marcos’ signature on
the two documents are merely initials unlike in the other documents
submitted by the BANK; (2) it is highly unnatural for the BANK to only
have duplicate copies of the two documents in its custody; (3) the address
of Marcos in the documents is different from the place of residence as

stated by Marcos in the other documents annexed by the BANK in its
Answer; (4) Pagsaligan made it appear that a check for the loan proceeds
of P470,588 less bank charges was issued to Marcos but the check’s
payee was one ATTY. LEONILO MARCOS and, as the trial court noted,
Marcos is not a lawyer; and (5) Pagsaligan was not sure what branch of
the BANK issued the check for the loan proceeds. The trial court was
convinced that Marcos did not execute the questionable documents
covering the P500,000 loan and Pagsaligan used these documents as a
means to justify his inability to explain and account for the time deposits
of Marcos.
The trial court noted the BANK’s "defective" documentation of its
transaction with Marcos. First, the BANK was not in possession of the
original copies of the documents like the loan applications. Second, the
BANK did not have a ledger of the accounts of Marcos or of his various
transactions with the BANK. Last, the BANK did not issue a certificate of
time deposit to Marcos. Again, the trial court attributed the BANK’s lapses
to Pagsaligan’s scheme to defraud Marcos of his time deposits.
The trial court also took note of Pagsaligan’s demeanor on the witness
stand. Pagsaligan evaded the questions by giving unresponsive or
inconsistent answers compelling the trial court to admonish him. When
the trial court ordered Pagsaligan to produce the documents, he
"conveniently became sick"15 and thus failed to attend the hearings
without presenting proof of his physical condition.
The trial court disregarded the BANK’s assertion that the time deposits
were converted into a savings account at 14% or 10% per annum upon
maturity. The BANK never informed Marcos that his time deposits had
already matured and these were converted into a savings account. As to
the interest due on the trust receipts, the trial court ruled that there is no
basis for such a charge because the documents do not stipulate any
interest.
In computing the amount due to Marcos, the trial court took into account
the marginal deposit that Marcos had already paid which is equivalent to
BANKING | Nature of Funds Deposited | 106
30% of the total amount of the three trust receipts. The three trust
receipts totalling P851,250 would then have a balance of P595,875. The
balance became due in March 1987 and on the same date, Marcos’ time
deposits of P669,932.30 had already earned interest from 1983 to 1987
totalling P569,323.21 at 17% per annum. Thus, the trial court ruled that
the time deposits in 1987 totalled P1,239,115. From this amount, the trial
court deducted P595,875, the amount of the trust receipts, leaving a
balance on the time deposits of P643,240 as of March 1987. However,
since the BANK failed to return the time deposits of Marcos, which again
matured in March 1990, the time deposits with interest, less the amount
of trust receipts paid in 1987, amounted to P971,292.49 as of March
1990.
In the alternative, the trial court ruled that even if Marcos had only one
time deposit of P764,897.67 as claimed by the BANK, the time deposit
would have still earned interest at the rate of 17% per annum. The time
deposit of P650,163 would have increased to P1,415,060 in 1987 after
earning interest. Deducting the amount of the three trust receipts,
Marcos’ time deposits still totalled P1,236,969.30 plus interest.
The dispositive portion of the decision of the trial court reads:
WHEREFORE, under the foregoing circumstances, judgment is hereby
rendered in favor of Plaintiff, directing Defendant Bank as follows:
1) to return to Plaintiff his time deposit in the sum of P971,292.49 with
interest thereon at the legal rate, until fully restituted;
2) to pay attorney’s fees of P200,000.00; [and]
3) [to pay the] cost of these proceedings. IT IS SO ORDERED.16
The Ruling of the Court of Appeals
The Court of Appeals addressed the procedural and substantive issues
that the BANK raised.

The appellate court ruled that the trial court committed a reversible error
when it denied the BANK’s motion to cross-examine Marcos. The appellate
court ruled that the right to cross-examine is a fundamental right that the
BANK did not waive because the BANK vigorously asserted this right. The
BANK’s failure to serve a notice of the motion to Marcos is not a valid
ground to deny the motion to cross-examine. The appellate court held
that the motion to cross-examine is one of those non-litigated motions
that do not require the movant to provide a notice of hearing to the other
party.
The Court of Appeals pointed out that when the trial court lifted the order
of default, it had the duty to afford the BANK its right to cross-examine
Marcos. This duty assumed greater importance because the only evidence
supporting the complaint is Marcos’ ex-parte testimony. The trial court
should have tested the veracity of Marcos’ testimony through the distilling
process of cross-examination. The Court of Appeals, however, believed
that the case should not be remanded to the trial court because Marcos’
testimony on the time deposits is supported by evidence on record from
which the appellate court could make an intelligent judgment.
On the second procedural issue, the Court of Appeals held that the trial
court did not err when it declared that the BANK had waived its right to
present its evidence and had submitted the case for decision. The
appellate court agreed with the grounds relied upon by the trial court in
its Order dated 7 September 1990.
The Court of Appeals, however, differed with the finding of the trial court
as to the total amount of the time deposits. The appellate court ruled that
the total amount of the time deposits of Marcos is only P764,897.67 and
not P1,429,795.34 as found by the trial court. The certification letter
issued by Pagsaligan showed that Marcos made a time deposit on 12
March 1982 for P764,897.67. The certification letter shows that the
amount mentioned in the letter was the aggregate or total amount of the
time deposits of Marcos as of that date. Therefore, the P764,897.67
already included the P664,897.67 time deposit made by Marcos on 11
March 1982.
BANKING | Nature of Funds Deposited | 107
The Court of Appeals further explained:
Besides, the Official Receipt (Exh. "B", p. 32, Records) dated March 11,
1982 covering the sum of P664,987.67 time deposit did not provide for a
maturity date implying clearly that the amount covered by said receipt
forms part of the total sum shown in the letter-certification which
contained a maturity date. Moreover, it taxes one’s credulity to believe
that appellee would make a time deposit on March 12, 1982 in the sum
of P764,897.67 which except for the additional sum of P100,000.00 is
practically identical (see underlined figures) to the sum
of P664,897.67 deposited the day before March 11, 1982.
Additionally, We agree with the contention of the appellant that the lower
court wrongly appreciated the testimony of Mr. Pagsaligan. Our finding is
strengthened when we consider the alleged application for loan by the
appellee with the appellant in the sum of P500,000.00 dated October 24,
1983. (Exh. "J", p. 40, Records), wherein it was stated that the loan is for
additional working capital versus the various time deposit amounting
to P760,000.00.17 (Emphasis supplied)
The Court of Appeals sustained the factual findings of the trial court in
ruling that Promissory Note No. 20-979-83 is void. There is no evidence
of a bank ledger or computation of interest of the loan. The appellate
court blamed the BANK for failing to comply with the orders of the trial
court to produce the documents on the loan. The BANK also made
inconsistent statements. In its Answer to the Complaint, the BANK alleged
that the loan was fully paid when it debited the time deposits of Marcos
with the loan. However, in its discussion of the assigned errors, the BANK
claimed that Marcos had yet to pay the loan.
The appellate court deleted the award of attorney’s fees. It noted that the
trial court failed to justify the award of attorney’s fees in the text of its
decision. The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, premises considered, the appealed decision is SET
ASIDE. A new judgment is hereby rendered ordering the appellant

bank to return to the appellee his time deposit in the sum
of P764,897.67 with 17% interest within 90 days from March 11,
1982 in accordance with the letter-certification and with legal
interest thereafter until fully paid. Costs against the appellant. SO
ORDERED.18 (Emphasis supplied)
The Issues
The BANK anchors this petition on the following issues:
1) WHETHER OR NOT THE PETITIONER [sic] ABLE TO PROVE THE
PRIVATE RESPONDENT’S OUTSTANDING OBLIGATIONS SECURED BY THE
ASSIGNMENT OF TIME DEPOSITS?
1.1) COROLLARILY, WHETHER OR NOT THE PROVISIONS OF SECTION 8
RULE 10 OF [sic] THEN REVISED RULES OF COURT BE APPLIED [sic] SO
AS TO CREATE A JUDICIAL ADMISSION ON THE GENUINENESS AND DUE
EXECUTION OF THE ACTIONABLE DOCUMENTS APPENDED TO THE
PETITIONER’S ANSWER?
2) WHETHER OR NOT PETITIONER [sic] DEPRIVED OF DUE PROCESS
WHEN THE LOWER COURT HAS [sic] DECLARED PETITIONER TO HAVE
WAIVED PRESENTATION OF FURTHER EVIDENCE AND CONSIDERED THE
CASE SUBMITTED FOR RESOLUTION?19
The Ruling of the Court
The petition is without merit.
Procedural Issues
There was no violation of the BANK’s right to procedural due process when
the trial court denied the BANK’s motion to cross-examine Marcos. Prior
to the denial of the motion, the trial court had properly declared the BANK
in default. Since the BANK was in default, Marcos was able to present his
evidence ex-parte including his own testimony. When the trial court lifted
the order of default, the BANK was restored to its standing and rights in
BANKING | Nature of Funds Deposited | 108
the action. However, as a rule, the proceedings already taken should not
be disturbed.20 Nevertheless, it is within the trial court’s discretion to
reopen the evidence submitted by the plaintiff and allow the defendant to
challenge the same, by cross-examining the plaintiff’s witnesses or
introducing countervailing evidence.21 The 1964 Rules of Court, the rules
then in effect at the time of the hearing of this case, recognized the trial
court’s exercise of this discretion. The 1997 Rules of Court retained this
discretion.22 Section 3, Rule 18 of the 1964 Rules of Court reads:
Sec. 3. Relief from order of default. — A party declared in default may
any time after discovery thereof and before judgment file a motion under
oath to set aside the order of default upon proper showing that his failure
to answer was due to fraud, accident, mistake or excusable neglect and
that he has a meritorious defense. In such case the order of default may
be set aside on such terms and conditions as the judge may
impose in the interest of justice. (Emphasis supplied)
The records show that the BANK did not ask the trial court to restore its
right to cross-examine Marcos when it sought the lifting of the default
order on 9 January 1990. Thus, the order dated 7 February 1990 setting
aside the order of default did not confer on the BANK the right to cross-
examine Marcos. It was only on 2 March 1990 that the BANK filed the
motion to cross-examine Marcos. During the 12 March 1990 hearing, the
trial court denied the BANK’s oral manifestation to grant its motion to
cross-examine Marcos because there was no proof of service on Marcos.
The BANK’s counsel pleaded for reconsideration but the trial court denied
the plea and ordered the BANK to present its evidence. Instead of
presenting its evidence, the BANK moved for the resetting of the hearing
and when the trial court denied the same, the BANK informed the trial
court that it was elevating the denial to the "upper court."23
To repeat, the trial court had previously declared the BANK in default. The
trial court therefore had the right to decide whether or not to disturb the
testimony of Marcos that had already been terminated even before the
trial court lifted the order of default.

We do not agree with the appellate court’s ruling that a motion to cross-
examine is a non-litigated motion and that the trial court gravely abused
its discretion when it denied the motion to cross-examine. A motion to
cross-examine is adversarial. The adverse party in this case had the right
to resist the motion to cross-examine because the movant had previously
forfeited its right to cross-examine the witness. The purpose of a notice
of a motion is to avoid surprises on the opposite party and to give him
time to study and meet the arguments.24 In a motion to cross-examine,
the adverse party has the right not only to prepare a meaningful
opposition to the motion but also to be informed that his witness is being
recalled for cross-examination. The proof of service was therefore
indispensable and the trial court was correct in denying the oral
manifestation to grant the motion for cross-examination.
We find no justifiable reason to relax the application of the rule on notice
of motions25 to this case. The BANK could have easily re-filed the motion
to cross-examine with the requisite notice to Marcos. It did not do so. The
BANK did not make good its threat to elevate the denial to a higher court.
The BANK waited until the trial court rendered a judgment on the merits
before questioning the interlocutory order of denial.
While the right to cross-examine is a vital element of procedural due
process, the right does not necessarily require an actual cross-
examination, but merely an opportunity to exercise this right if desired
by the party entitled to it.26 Clearly, the BANK’s failure to cross-examine
is imputable to the BANK when it lost this right 27 as it was in default and
failed thereafter to exhaust the remedies to secure the exercise of this
right at the earliest opportunity.
The two other procedural lapses that the BANK attributes to the appellate
and trial courts deserve scant consideration.
The BANK raises for the very first time the issue of judicial admission on
the part of Marcos. The BANK even has the audacity to fault the Court of
Appeals for not ruling on this issue when it never raised this matter before
the appellate court or before the trial court. Obviously, this issue is only
BANKING | Nature of Funds Deposited | 109
an afterthought. An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel.28
The BANK cannot claim that Marcos had admitted the due execution of
the documents attached to its answer because the BANK filed its answer
late and even failed to serve it on Marcos. The BANK’s answer, including
the actionable documents it pleaded and attached to its answer, was a
mere scrap of paper. There was nothing that Marcos could specifically
deny under oath. Marcos had already completed the presentation of his
evidence when the trial court lifted the order of default and admitted the
BANK’s answer. The provision of the Rules of Court governing admission
of actionable documents was not enacted to reward a party in default. We
will not allow a party to gain an advantage from its disregard of the rules.
As to the issue of its right to present additional evidence, we agree with
the Court of Appeals that the trial court correctly ruled that the BANK had
waived this right. The BANK cannot now claim that it was deprived of its
right to conduct a re-direct examination of Pagsaligan. The BANK
postponed the hearings three times29 because of its inability to secure
Pagsaligan’s presence during the hearings. The BANK could have
presented another witness or its other evidence but it obstinately insisted
on the resetting of the hearing because of Pagsaligan’s absence allegedly
due to illness.
The BANK’s propensity for postponements had long delayed the case. Its
motion for postponement based on Pagsaligan’s illness was not even
supported by documentary evidence such as a medical certificate.
Documentary evidence of the illness is necessary before the trial court
could rule that there is a sufficient basis to grant the postponement.30
The BANK’s Fiduciary Duty to its Depositor
The BANK is liable to Marcos for offsetting his time deposits with a
fictitious promissory note. The existence of Promissory Note No. 20-979-
83 could have been easily proven had the BANK presented the original
copies of the promissory note and its supporting evidence. In lieu of the
original copies, the BANK presented the "machine copies of the duplicate"

of the documents. These substitute documents have no evidentiary value.
The BANK’s failure to explain the absence of the original documents and
to maintain a record of the offsetting of this loan with the time deposits
bring to fore the BANK’s dismal failure to fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General Banking Law of 2000)
expressly imposes this fiduciary duty on banks when it declares that the
State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." This statutory declaration
merely echoes the earlier pronouncement of the Supreme Court in Simex
International (Manila) Inc. v. Court of Appeals31 requiring banks to "treat
the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship."32 The Court reiterated this
fiduciary duty of banks in subsequent cases.33
Although RA No. 8791 took effect only in the year 2000,34 at the time that
the BANK transacted with Marcos, jurisprudence had already imposed on
banks the same high standard of diligence required under RA No.
8791.35 This fiduciary relationship means that the bank’s 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. Thus, the BANK’s
fiduciary duty imposes upon it a higher level of accountability than that
expected of Marcos, a businessman, who negligently signed blank forms
and entrusted his certificates of time deposits to Pagsaligan without
retaining copies of the certificates.
The business of banking is imbued with public interest. The stability of
banks largely depends on the confidence of the people in the honesty and
efficiency of banks. In Simex International (Manila) Inc. v. Court of
Appeals36 we pointed out the depositor’s reasonable expectations from a
bank and the bank’s corresponding duty to its depositor, as follows:
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
BANKING | Nature of Funds Deposited | 110
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.
As the BANK’s depositor, Marcos had the right to expect that the BANK
was accurately recording his transactions with it. Upon the maturity of his
time deposits, Marcos also had the right to withdraw the amount due him
after the BANK had correctly debited his outstanding obligations from his
time deposits.
By the very nature of its business, the BANK should have had in its
possession the original copies of the disputed promissory note and the
records and ledgers evidencing the offsetting of the loan with the time
deposits of Marcos. The BANK inexplicably failed to produce the original
copies of these documents. Clearly, the BANK failed to treat the account
of Marcos with meticulous care.
The BANK claims that it is a reputable banking institution and that it has
no reason to forge Promissory Note No. 20-979-83. The trial court and
appellate court did not rule that it was the bank that forged the
promissory note. It was Pagsaligan, the BANK’s branch manager and a
close friend of Marcos, whom the trial court categorically blamed for the
fictitious loan agreements. The trial court held that Pagsaligan made up
the loan agreement to cover up his inability to account for the time
deposits of Marcos.
Whether it was the BANK’s negligence and inefficiency or Pagsaligan’s
misdeed that deprived Marcos of the amount due him will not excuse the
BANK from its obligation to return to Marcos the correct amount of his
time deposits with interest. The duty to observe "high standards of
integrity and performance" imposes on the BANK that obligation. The
BANK cannot also unjustly enrich itself by keeping Marcos’ money.
Assuming Pagsaligan was behind the spurious promissory note, the BANK
would still be accountable to Marcos. We have held that a bank is liable

for the wrongful acts of its officers done in the interest of the bank or in
their dealings as bank representatives but not for acts outside the scope
of their authority.37 Thus, we held:
A bank holding out its officers and agents as worthy of confidence will not
be permitted to profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114).
Accordingly, a banking corporation is liable to innocent third persons
where the representation is made in the course of its business by an agent
acting within the general scope of his authority even though, in the
particular case, the agent is secretly abusing his authority and attempting
to perpetrate a fraud upon his principal or some other person, for his own
ultimate benefit.38
The Existence of Promissory Note No. 20-979-83 was not Proven
The BANK failed to produce the best evidence — the original copies of the
loan application and promissory note. The Best Evidence Rule provides
that the court shall not receive any evidence that is merely substitutionary
in its nature, such as photocopies, as long as the original evidence can be
had.39 Absent a clear showing that the original writing has been lost,
destroyed or cannot be produced in court, the photocopy must be
disregarded, being unworthy of any probative value and being an
inadmissible piece of evidence.40
What the BANK presented were merely the "machine copies of the
duplicate" of the loan application and promissory note. No explanation
was ever offered by the BANK for its inability to produce the original
copies of the documentary evidence. The BANK also did not comply with
the orders of the trial court to submit the originals.
The purpose of the rule requiring the production of the best evidence is
the prevention of fraud.41 If a party is in possession of evidence and
withholds it, and seeks to substitute inferior evidence in its place, the
BANKING | Nature of Funds Deposited | 111
presumption naturally arises that the better evidence is withheld for
fraudulent purposes, which its production would expose and defeat.42
The absence of the original of the documentary evidence casts suspicion
on the existence of Promissory Note No. 20-979-83 considering the
BANK’s fiduciary duty to keep efficiently a record of its transactions with
its depositors. Moreover, the circumstances enumerated by the trial court
bolster the conclusion that Promissory Note No. 20-979-83 is bogus. The
BANK has only itself to blame for the dearth of competent proof to
establish the existence of Promissory Note No. 20-979-83.
Total Amount Due to Marcos
The BANK and Marcos do not now dispute the ruling of the Court of
Appeals that the total amount of time deposits that Marcos placed with
the BANK is only P764,897.67 and not P1,429,795.34 as found by the
trial court. The BANK has always argued that Marcos’ time deposits only
totalled P764,897.67.43 What the BANK insists on in this petition is the
trial court’s violation of its right to procedural due process and the
absence of any obligation to pay or return anything to Marcos. Marcos,
on the other hand, merely prays for the affirmation of either the trial court
or appellate court decision.44 We uphold the finding of the Court of
Appeals as to the amount of the time deposits as such finding is in accord
with the evidence on record.
Marcos claimed that the certificates of time deposit were with Pagsaligan
for safekeeping. Marcos was only able to present the receipt dated 11
March 1982 and the letter-certification dated 12 March 1982 to prove the
total amount of his time deposits with the BANK. The letter-certification
issued by Pagsaligan reads:
March 12, 1982
Dear Mr. Marcos:

This is to certify that we are taking care in your behalf various Time
Deposit Certificates with an aggregate value of PESOS: SEVEN HUNDRED
SIXTY FOUR THOUSAND EIGHT HUNDRED NINETY SEVEN AND 67/100
(P764,897.67) ONLY, issued today for 90 days at 17% p.a. with the
interest payable at maturity on June 10, 1982.
Thank you.
Sgd. FLORENCIO B. PAGSALIGAN
Branch Manager45
The foregoing certification is clear. The total amount of time deposits of
Marcos as of 12 March 1982 is P764,897.67, inclusive of the sum
of P664,987.67 that Marcos placed on time deposit on 11 March 1982.
This is plainly seen from the use of the word "aggregate."
We are not swayed by Marcos’ testimony that the certification is actually
for the first time deposit that he placed on 11 March 1982. The letter-
certification speaks of "various Time Deposits Certificates with an
‘aggregate value’ of P764,897.67." If the amount stated in the letter-
certification is for a single time deposit only, and did not include the 11
March 1982 time deposit, then Marcos should have demanded a new
letter of certification from Pagsaligan. Marcos is a businessman. While he
already made an error in judgment in entrusting to Pagsaligan the
certificates of time deposits, Marcos should have known the importance
of making the letter-certification reflect the true nature of the transaction.
Marcos is bound by the letter-certification since he was the one who
prodded Pagsaligan to issue it.
We modify the amount that the Court of Appeals ordered the BANK to
return to Marcos. The appellate court did not offset Marcos’ outstanding
debt with the BANK covered by the three trust receipt agreements even
though Marcos admits his obligation under the three trust receipt
agreements. The total amount of the trust receipts is P851,250 less the
30% marginal deposit of P255,375 that Marcos had already paid the
BANKING | Nature of Funds Deposited | 112
BANK. This reduced Marcos’ total debt with the BANK to P595,875 under
the trust receipts.
The trial and appellate courts found that the parties did not agree on the
imposition of interest on the loan covered by the trust receipts and thus
no interest is due on this loan. However, the records show that the three
trust receipt agreements contained stipulations for the payment of
interest but the parties failed to fill up the blank spaces on the rate of
interest. Put differently, the BANK and Marcos expressly agreed in writing
on the payment of interest46 without, however, specifying the rate of
interest. We, therefore, impose the legal interest of 12% per annum, the
legal interest for the forbearance of money,47 on each of the three trust
receipts.
Based on Marcos’ testimony48 and the BANK’s letter of demand,49 the trust
receipt agreements became due in March 1987. The records do not show
exactly when in March 1987 the obligation became due. In accordance
with Article 2212 of the Civil Code, in such a case the court shall fix the
period of the duration of the obligation.50 The BANK’s letter of demand is
dated 6 March 1989. We hold that the trust receipts became due on 6
March 1987.
Marcos’ payment of the marginal deposit of P255,375 for the trust
receipts resulted in the proportionate reduction of the three trust receipts.
The reduced value of the trust receipts and their respective interest as of
6 March 1987 are as follows:
1. Trust Receipt No. CD 83.7 issued on 8 March 1983 originally
for P300,000 was reduced to P210,618.75 with interest of P101,027.76.51
2. Trust Receipt No. CD 83.9 issued on 15 March 1983 originally
for P300,000 was reduced to P210,618.75 with interest of P100,543.04.52
3. Trust Receipt No. CD 83.10 issued on 15 March 1983 originally
for P251,250 was reduced to P174,637.5 with interest of P83,366.68. 53
 BANKING | Nature of Funds Deposited | 113

When the trust receipts became due on 6 March 1987, Marcos owed the return to private respondent Leonilo Marcos P500,404.11, the remaining
BANK P880,812.48. This amount included P595,875, the principal value principal amount of his time deposits, with interest at 17% per
of the three trust receipts after payment of the marginal deposit, annum from 30 August 1989 until full payment. Petitioner Philippine
and P284,937.48, the interest then due on the three trust receipts. Banking Corporation is also ordered to pay to private respondent Leonilo
Marcos P211,622.96, the accumulated interest as of 30 August 1989, plus
Upon maturity of the three trust receipts, the BANK should have 12% legal interest per annum from 30 August 1989 until full payment.
automatically deducted, by way of offsetting, Marcos’ outstanding debt to Petitioner Philippine Banking Corporation is further ordered to
the BANK from his time deposits and its accumulated interest. Marcos’ pay P100,000 by way of moral damages and P20,000 as exemplary
time deposits of P764,897.67 had already earned damages to private respondent Leonilo Marcos.
interest54 of P616,318.92 as of 6 March 1987.55 Thus, Marcos’ total funds
with the BANK amounted to P1,381,216.59 as of the maturity of the trust Costs against petitioner.
receipts. After deducting P880,812.48, the amount Marcos owed the
BANK, from Marcos’ funds with the BANK of P1,381,216.59, Marcos’ SO ORDERED.
remaining time deposits as of 6 March 1987 is only P500,404.11. The
accumulated interest on this P500,404.11 as of 30 August 1989, the date
of filing of Marcos’ complaint with the trial court, is P211,622.96.56 From
30 August 1989, the interest due on the accumulated interest
of P211,622.96 should earn legal interest at 12% per annum pursuant to
Article 221257 of the Civil Code.

The BANK’s dismal failure to account for Marcos’ money justifies the
award of moral58 and exemplary damages.59 Certainly, the BANK, as
employer, is liable for the negligence or the misdeed of its branch
manager which caused Marcos mental anguish and serious
anxiety.60 Moral damages of P100,000 is reasonable and is in accord with
our rulings in similar cases involving banks’ negligence with regard to the
accounts of their depositors.61

We also award P20,000 to Marcos as exemplary damages. The law allows

the grant of exemplary damages by way of example for the public
good.62 The public relies on the banks’ fiduciary duty to observe the
highest degree of diligence. The banking sector is expected to maintain
at all times this high level of meticulousness.63

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with

MODIFICATION. Petitioner Philippine Banking Corporation is ordered to
 BANKING | Nature of Funds Deposited | 114

SET-OFF Packing Credit April 4, 1978 P18,000.00

Packing Credit April 19, 1978 P23,000.00
G.R. No. 172020 December 6, 2010
On June 22, 1977, petitioner transferred the amount of ₱1,150.00 from
TRADERS ROYAL BANK, Petitioner,
respondents’ current account to their savings account, which was
vs.
NORBERTO CASTAÑARES and MILAGROS erroneously posted as ₱1,500.00 but later corrected to reflect the figure
CASTAÑARES, Respondents. ₱1,150.00 in the savings account passbook. By the second quarter of
1978, the loans began to mature and the letters of credit against which
VILLARAMA, JR., J.: the packing advances were granted started to expire. Meanwhile, on
December 7, 1979, petitioner, without notifying the respondents, applied
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil
to the payment of respondents’ outstanding obligations the sum of
Procedure, as amended, is the Decision1 dated January 11, 2006 of the
$4,220.00 or ₱30,930.49 which was remitted to the respondents thru
Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint
telegraphic transfer from AMROBANK, Amsterdam by one Richard
Decision2 dated August 26, 1998 of the Regional Trial Court (RTC) of Cebu
Wagner. The aforesaid entries in the passbook of respondents and the
City, Branch 13 in Civil Case Nos. R-22608 and CEB-112.
$4,220.00 telegraphic transfer were the subject of respondents’ letter-
The Facts complaint5 dated September 20, 1982 addressed to the Manager of the
Regional Office of the Central Bank of the Philippines.
Respondent-spouses Norberto and Milagros Castañares are engaged in
the business of exporting shell crafts and other handicrafts. Between 1977 For failure of the respondents to pay their outstanding loans with
and 1978, respondents obtained from petitioner Traders Royal Bank petitioner, the latter proceeded with the extrajudicial foreclosure of the
various loans and credit accommodations. Respondents executed two real real estate mortgages.6 Thereafter, a Certificate of Sale7 covering all the
estate mortgages (REMs) dated April 18, 1977 and January 25, 1978 mortgaged properties was issued by Deputy Sheriff Wilfredo P. Borces in
covering their properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 favor of petitioner as the lone bidder for ₱117,000.00 during the auction
and T-37191). As evidenced by Promissory Note No. BD-77-113 dated sale conducted on November 24, 1981. Said certificate of sale was
May 10, 1977, petitioner released only the amount of ₱35,000.00 registered with the Office of the Register of Deeds on February 4, 1982.
although the mortgage deeds indicated the principal amounts as
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for
₱86,000.00 and ₱60,000.00.3
deficiency judgment, claiming that after applying the proceeds of
Respondents were further granted additional funds on various dates foreclosure sale to the total unpaid obligations of respondents
under promissory notes4 they executed in favor of the petitioner: (₱200,397.78), respondents were still indebted to petitioner for the sum
of ₱83,397.68.8 Respondents filed their Answer With Counterclaim on
Type of Loan Date Granted Amount December 27, 1982.9
Packing Credit May 10, 1977 P19,000.00
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the
Packing Credit May 18, 1977 P25,000.00
recovery of the sums of ₱2,584.27 debited from their savings account
Packing Credit June 23, 1977 P12,500.00
passbook and the equivalent amount of $4,220.00 telegraphic transfer,
Packing Credit August 19, 1977 P 2,900.00

and in addition, $55,258.85 representing the damage suffered by the
respondents from letters of credit left un-negotiated because of
petitioner’s refusal to pay the $4,220.00 demanded by the respondents.10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC
In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the
petitioner, as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
Civil Case No. R-22608 in favor of the plaintiff and against the defendants
directing the defendants jointly and solidarily to pay plaintiff the sum of
₱83,397.68 with legal rate of interest to be computed from November 24,
1981 (the date of the auction sale) until full payment thereof. They are
likewise directed to pay plaintiff attorney’s fees in the sum of ₱10,000.00
plus litigation expenses in the amount of ₱2,500.00.
With cost against defendants.
In CEB-112, judgment is hereby rendered dismissing the complaint.
With cost against the plaintiff. SO ORDERED.12
The trial court found that despite respondents’ insistence that the REM
covered only a separate loan for ₱86,000.00 which they believed
petitioner committed to lend them, the evidence clearly shows that said
REM was constituted as security for all the promissory notes. No separate
demand was made for the amount of ₱86,000.00 stated in the REM, as
the demand was limited to the amounts of the promissory notes. The trial
court further noted that respondents never questioned the judgment for
extrajudicial foreclosure, the certificate of sale and the deficiency in that
case.13
With respect to the passbook entries, the trial court stated that no
objection thereto was made by the respondents until five years later when
BANKING | Nature of Funds Deposited | 115
in a letter dated August 10, 1982, respondents’ counsel asked petitioner
to be enlightened on the matter. Neither did respondents protest the
application of the balance (₱1,150.00) in the passbook to his account with
petitioner. More important, respondent Norberto Castañares in his
testimony admitted that the matter was already clarified to him by
petitioner and that the latter had the right to apply his deposit to his loan
accounts. Admittedly, his complaint has to do more with the lack of
consent on his part and the non-issuance of official receipt. However, he
did not follow up his request for official receipt as he did not want to be
going back and forth to the bank.14
CA Ruling
With the trial court’s denial of their motion for reconsideration,
respondents appealed to the CA. Finding merit in respondents’
arguments, the appellate court set aside the trial court’s judgment under
its Decision15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by us GRANTING the appeal filed in this case and REVERSING
AND SETTING ASIDE the Joint Decision dated August 26, 1998, Regional
Trial Court, 7th Judicial Region, Branch 13, in Civil Case No. R-22608 and
Civil Case No. CEB-112. With regard to Civil Case No. R-22608, the real
estate mortgage dated April 18, 1977 is hereby DECLARED as valid in part
as to the amount of P35,000.00 actually released in favor of appellants,
while the real estate mortgage dated January 26, 1978 is hereby declared
as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby
ordered to release the amount of US$4,220.90 to the appellants at its
current rate of exchange. No pronouncement as to costs. SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate
evidence presented to prove that petitioner released in full to the
respondents the proceeds of the REM loan. Citing Filipinas Marble
Corporation v. Intermediate Appellate Court17 and Naguiat v. Court of
Appeals,18 the appellate court declared that where there was failure of the
mortgagee bank to deliver the consideration for which the mortgage was

executed, the contract of loan was invalid and consequently the accessory
contract of mortgage is likewise null and void. In this case, only
₱35,000.00 out of the ₱86,000.00 stated in the REM dated April 18, 1977
was released to respondents, and hence the REM was valid only to that
extent. For the same reason, the second REM was null and void since no
actual loan proceeds were released to the respondents-mortgagors. The
REMs are not connected to the subsequent promissory notes because
these were signed by respondents for the sole purpose of securing
packing credits and export advances. Further citing Acme Shoe, Rubber
and Plastic Corp. v. Court of Appeals,19 the CA stated that the rule is that
a pledge, real estate mortgage or antichresis may exceptionally secure
after-incurred obligations only as long as these debts are accurately
described therein. In this case, neither of the two REMs accurately
described or even mentioned the securing of future debts or obligations.20
The CA thus held that petitioner’s remedy would be to file a collection
case on the unpaid promissory notes which were not secured by the REMs.
As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had
no basis for withholding and applying the said amount to respondents’
loan account. Said transaction was separate and distinct from the contract
of loan between petitioner and respondents. Petitioner had no authority
to convert the said telegraphic transfer into cash since the participation
of respondents was necessary to sign and indorse the disbursement
voucher and check. Moreover, petitioner was not transparent in its actions
as it did not inform the respondents of its intention to apply the proceeds
of the telegraphic transfer to their loan account and worse, it did not even
present an official receipt to prove payment. Section 5 of Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act, provides
that there shall be no restriction on the withdrawability by the depositor
of his deposit or the transferability of the same abroad except those
arising from contract between the depositor and the bank.21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
BANKING | Nature of Funds Deposited | 116
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE
MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PART TO THE
EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED
TO HAVE BEEN ACTUALLY RELEASED TO RESPONDENTS OUT OF THE SUM
OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID
THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN THAT NO
ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE
RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD
NO BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING IN
PAYMENT OF RESPONDENTS’ OVERDUE ACCOUNT IN THE TELEGRAPHIC
TRANSFER IN THE AMOUNT OF U.S.$4,220.00.22
Petitioner contends that the CA overlooked the specific stipulation in the
REMs that the mortgage extends not only to the amounts specified therein
but also to loans or credits subsequently granted, which include the
packing credits and export advances obtained by the respondents.
Moreover, the amounts indicated on the REMs need not exactly be the
same amounts that should be released and covered by checks or credit
memos, the same being only the maximum sum or "ceiling" which the
REM secures, as explained by petitioner’s witness, Ms. Blesy Nemeño. Her
testimony does not prove that the proceeds of the loans were not released
in full, as no credit memos in the specific amounts received by the
respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its
conclusion that the promissory notes were totally unrelated to the REMs.
In the Acme case, the pronouncement was that the after-incurred
obligations must, at the time they are contracted, only be accurately
described in a proper instrument as in the case of a promissory note. The
confusion was brought by the use in the CA decision of the word "therein"
which is not found in the text of the Acme ruling. Besides, it is way too
impossible that future loans can be accurately described, as the CA

opined, at the time that a deed of real estate mortgage is executed. The
CA’s reliance on the case of Filipinas Marble Corporation, is likewise
misplaced as it finds no application under the facts obtaining in the
present case. The misappropriation by some individuals of the loan
proceeds secured by petitioner was the consideration which compelled
this Court to rule that there was failure on the part of DBP to deliver the
consideration for which the mortgage was executed. Similarly, the case
of Naguiat is inapplicable in that there was evidence that an agent of the
creditor withheld from the debtor the checks representing the proceeds
of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the
telegraphic transfer in the sum of $4,220.00 against the unpaid loan
account of respondents. Citing Bank of the Philippine Islands v. Court of
Appeals,23 petitioner asserts that they are bound principally as both
creditors and debtors of each other, the debts consisting of a sum of
money, both due, liquidated and demandable, and are not claimed by a
third person. Hence, the RTC did not err in holding that petitioner validly
applied the amount of ₱30,930.20 (peso equivalent of $4,220.00) to the
loan account of the respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit
accommodations obtained, from the Mortgagee by the Mortgagor
and/or SPS. NORBERTO V. CASTAÑARES & MILAGROS M.
CASTAÑARES and to secure the payment of the same, the principal of all
of which is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY
– (P86,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may hereafter extend to the Mortgagor x x x, including interest
and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary, as appears in the accounts,
books and records of the Mortgagee x x x.24 (Emphasis supplied.)
BANKING | Nature of Funds Deposited | 117
The above stipulation is also known as "dragnet clause" or "blanket
mortgage clause" in American jurisprudence that would subsume all debts
of past and future origins. It has been held as a valid and legal
undertaking, the amounts specified as consideration in the contracts do
not limit the amount for which the pledge or mortgage stands as security,
if from the four corners of the instrument, the intent to secure future and
other indebtedness can be gathered. A pledge or mortgage given to
secure future advancements is a continuing security and is not discharged
by the repayment of the amount named in the mortgage until the full
amount of all advancements shall have been paid.25
A "dragnet clause" operates as a convenience and accommodation to the
borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et
cetera.26 While a real estate mortgage may exceptionally secure future
loans or advancements, these future debts must be sufficiently described
in the mortgage contract. An obligation is not secured by a mortgage
unless it comes fairly within the terms of the mortgage contract.27
In holding that the REMs were null and void, the CA opined that the full
amount of the principal loan stated in the deed should have been released
in full, sustaining the position of the respondents that the promissory
notes were not secured by the mortgage and unrelated to it. However, a
reading of the afore-quoted provision of the REMs shows that its terms
are broad enough to cover packing credits and export advances granted
by the petitioner to respondents. That the respondents subsequently
availed of letters of credit and export advances in various amounts as
reflected in the promissory notes, buttressed the claim of petitioner that
the amounts of ₱86,000.00 and ₱60,000.00 stated in the REMs merely
represent the maximum total loans which will be secured by the
mortgage. This must be so as respondents confirmed that the mortgage
was constituted for the purpose of obtaining additional capital as dictated
by the needs of their export business. Significantly, no complaint was
made by the respondents as to the non-release of ₱86,000.00 and
₱60,000.00, in full, simultaneous or immediately following the execution

of the REMs -- under a single promissory note each equivalent to the said
sums -- and no demand for the said specific amounts was ever made by
the petitioner. Even the letter-complaint sent by respondents to the
Central Bank almost a year after the extrajudicial foreclosure sale
mentioned only the questioned entries in their passbook and the
$4,220.00 telegraphic transfer. Considering that respondents deemed it
a serious "banking malpractice" for petitioner not to release in full the
loan amount stated in the REMs, it can only be inferred that respondents
themselves understood that the ₱86,000.00 and ₱60,000.00 indicated in
the REMs was intended merely to fix a ceiling for the loan
accommodations which will be secured thereby and not the actual
principal loan to be released at one time. Thus, the RTC did not err in
upholding the validity of the REMs and ordering the respondents to pay
the deficiency in the foreclosure sale to satisfy the remaining mortgage
indebtedness.
The cases relied upon by the CA are all inapplicable to the present
controversy.lawph!1 In Filipinas Marble Corporation, we held that pending
the outcome of litigation between DBP which together with Bancom
officers were alleged by the petitioner-mortgagor to have misspent and
misappropriated the $5 million loan granted by DBP, the provisions of
P.D. No. 385 prohibiting injunctions against foreclosures by government
financial institutions, cannot be automatically applied. Foreclosure of the
mortgaged properties for the whole amount of the loan was deemed
prejudicial to the petitioner, its employees and their families since the
true amount of the loan which was applied for the benefit of the petitioner
can be determined only after a trial on the merits.28 No such act of
misappropriation by corporate officers appointed by the mortgagee is
involved in this case. Besides, the respondents never denied receiving the
amounts under the promissory notes which were all covered by the REMs
and the very obligations subject of the extrajudicial foreclosure.
As to the ruling in Naguiat, we found therein no compelling reason to
disturb the lower courts’ finding that the lender did not remit and the
borrower did not receive the proceeds of the loan. Hence, we held the
mortgage contract, being just an accessory contract, as null and void for
BANKING | Nature of Funds Deposited | 118
absence of consideration.29 In this case, however, respondents admitted
they received all the amounts under the promissory notes presented by
the petitioner. The consideration in the execution of the REMs consist of
those credit accommodations to fund their export transactions.
Respondents as an afterthought raised issue on the nature of the amounts
of principal loan indicated in the REMs long after these obligations have
matured and the mortgage foreclosed due to their failure to fully settle
their outstanding accounts with petitioner. Having expressly agreed to the
terms of the REMs which are phrased to secure all such loans and
advancements to be obtained from petitioner, although the principal
amount stated therein were not released at one time and under several,
not just one, subsequently issued promissory notes, respondents may not
be allowed to complain later that the amounts they received were
unrelated to the REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by
the petitioner to the loan account of respondents, we hold that the CA
erred in holding that petitioner had no authority to do so by way of
compensation or set off. In this case, the parties stipulated on the manner
of such set off in case of non-payment of the amount due under each
promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at
maturity, I/We jointly and severally, agree to pay an additional amount
equivalent to two per cent (2%) per annum of the amount due and
demandable as penalty and collection charges, in the form of liquidated
damages, until fully paid; and the further sum of ten per cent (10%)
thereof in full, without any deduction, as and for attorney’s fees whether
actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and
authorize the TRADERS ROYAL BANK, at its option, and without notice, to
set-off or to apply to the payment of this note any and all funds, which
may be in its hands on deposit or otherwise belonging to anyone or all of
us, and to hold as security therefor any real or personal property, which
 BANKING | Nature of Funds Deposited | 119

may be in its possession or control by virtue of any other

contract.30 (Emphasis supplied.)

Agreements for compensation of debts or any obligations when the

parties are mutually creditors and debtors are allowed under Art. 1282 of
the Civil Code even though not all the legal requisites for legal
compensation are present. Voluntary or conventional compensation is not
limited to obligations which are not yet due.31 The only requirements for
conventional compensation are (1) that each of the parties can fully
dispose of the credit he seeks to compensate, and (2) that they agree to
the extinguishment of their mutual credits.32 Consequently, no error was
committed by the trial court in holding that petitioner validly applied, by
way of compensation, the $4,220.00 telegraphic transfer remitted by
respondents’ foreign client through the petitioner.

WHEREFORE, the petition is GRANTED. The Decision dated January 11,

2006 of the Court of Appeals in CA-G.R. CV No. 67257 is REVERSED and
SET ASIDE. The Joint Decision dated August 26, 1998 of the Regional
Trial Court of Cebu City, Branch 13 in Civil Case Nos. R-22608 and CEB-
112 is REINSTATED and UPHELD.

No pronouncement as to costs.

SO ORDERED.
 BANKING | Nature of Funds Deposited | 120

ADVERSE CLAIM interest from June 23, 1926, the date of the filing of the complaint, and
with costs. From this judgment the defendant bank appealed.
G.R. No. 32576 November 6, 1930
It appears that in the month of March, 1921, the plaintiff the Fulton Iron
FULTRON IRON WORKS CO., plaintiff-appellee,
vs. Works Co., of St. Louis, Missouri, sold to the Binalbagan Estate, Inc., a
CHINA BANKING CORPORATION, ET AL., defendants. Philippine corporation, machinery for a sugar mill, for which the purchaser
CHINA BANKING CORPORATION, appellant. executed three notes amounting to about $80,000. The first of these
notes became due October 1, 1921, and the other two on April 1, 1922.
STREET, J.:
Neither of the three notes was paid at maturity, owing to the fact that,
This action was instituted on June 23, 1926, in the Court of First Instance before the notes fell due, the Binalbagan Estate, Inc. suspended
of the City of Manila by the Fulton Iron Works Co., a Delaware corporation payments and passed into the hands of the Philippine National Bank, its
having its principal place of business in St. Louis, Missouri, and duly principal creditor, for administration.
authorized under the laws of the Philippine Islands to engage in business
The consequently delay in the payments of the notes caused the plaintiff
in this country. The defendants named in the complaint are the China
to employ a firm of lawyers in Manila, of which S. C. Schwarzkopf was
Banking Corporation, a domestic corporation having its principal place of
then a member, to represent the plaintiff in an effort to obtain security
business in the City of Manila, and one S. C. Schwarzkopf. In the petitory
for the indebtedness, with a view to its later collection. At the time this
part of the complaint judgment is sought against the two defendants
retainer was effect, Schwarzkopf was in St. Louis, on a visit to the United
jointly and severally for the sum of P131,197.10, with interest. As a
States, and in order that the plaintiff might comply with the laws of the
ground of action against the two defendants it is asserted in the complaint
Philippine Islands in the matter of obtaining a license to transact business
that the amount claimed by the plaintiff is part of a larger sum of money
here, the plaintiff executed a formal power of attorney authorizing the
(P176, 197.10) belonging to the plaintiff which had been deposited in the
members of Schwarzkopf's firm jointly and severally to accept service in
defendant bank by Schwarzkopf during the year 1922, and which had
actions and to do other things necessary to enable the plaintiff to secure
been misappropriated and embezzled by him, with the full knowledge and
the contemplated license. It is noteworthy that the authority of
consent of the defendant bank. The idea underlying the action, as against
Schwarzkopf's firm to represent the plaintiff in the collection of the claims
the bank, is that it has been guilty of what may perhaps be styled a civil
above mentioned did not proceed from this power, but had its origin in
complicity in the misappropriation of the money for which recovery is
the employment of said firm as attorneys in the matter.
sought.
Schwarzkopf returned to Manila in the early part of November, 1921, and
Upon hearing the cause, upon the separate answers of the two
the law firm to which he pertained was dissolved on November 15, 1921.
defendants, the trial court absolved Schwarckopf from the complaint, for
Under the dissolution agreement the matter of handling this collection
the reason that in two prior criminal proceedings he had been convicted
devolved upon Schwarzkopf, and he alone was thereafter concerned in
of the offense of estafa, based upon his misappropriated of the same
the matter.
money, and in said proceedings the obligation to indemnify the plaintiff
had been imposed upon him in the amount of P146,197.40. His Honor,
On December 13, 1921, Schwarzkopf opened a personal account, as a
however, gave judgment in favor of the plaintiff, the Fulton Iron Works
depositor, in the China Banking Corporation by making a deposit, on that
Co., to recover of the defendant bank the sum of P127,200.36, with lawful

date, of the sum of P578. This account was at all times modest in sized,
and on January 1, 1922, the credit balance therein was P543.35. This
account has little or no significance in the case, and it became defunct by
September 1, 1922. It may be observed, however, that a few of the
deposits in this account appear to have been taken from account No. 2 to
which reference will presently be made.
In the early part of the year 1922, the financial condition of the
Binalbagan Estate, Inc. began to improve; and on January 13, 1922, D.
M. Semple, manager of the Philippine Sugar Centrals Agency, a
department of the Philippine National Bank, drew check No. 574 for the
sum of P10,000, payable to the order of Sydney C. Schwarzkopf, and
delivered the same to him in part payment of the indebtedness owing to
the plaintiff from the Binalbagan Estate, Inc. Upon receiving this check
Schwarzkopf signed a receipt as "attorney-in-fact of Fulton Iron Works
Co." The character of attorney-in-fact, thus assumed by Schwarzkopf,
was of course a mere fiction, as the power of attorney which he really
possessed was limited to other matters. The point, however, is really of
no moment.
The check for P10,000 above mentioned was duly indorsed by
Schwarzkopf and deposited by him in a new account with the defendant
bank, known as "No. 2 account." This money was thereafter withdrawn
from the bank from time to time by Schwarzkopf, upon his personal
checks, and used for his individual purposes. In the appealed judgment
the defendant is held liable for this money, a mere oversight resulting
apparently, from a confusion of this matter with the more important
issues involved in other parts of the case. There is no proof that the
defendant bank had any knowledge, or was chargeable with notice, that
the P10,000 thus deposited and drawn out belonged to any person other
than Schwarzkopf himself; and, as depositor, Schwarzkopf of course had
absolute control of the account. A depositor is presumed to be the owner
of funds standing in his name in a bank deposit; and where a bank is not
chargeable with notice that the money deposited in such account is the
property of some other person than the depositor, the bank is justified in
paying out the money to the depositor or upon his order, and cannot be
BANKING | Nature of Funds Deposited | 121
liable to any other person as the true owner. It is hardly necessary to cite
authority upon a proposition so manifestly in accord with the usage and
the common sense of the commercial community. The proposition stated
is implicit in all the cases concerned with the question of the liability of a
bank to its depositors and other persons claiming an interest in the
deposits.
Proceeding to the next collection effected by Schwarzkopf upon account
of the plaintiff's claim against the Binalbagan Estate, Inc., we find that on
April 11, 1922, Schwarkopf received, from the manager of the Philippine
Sugar Centrals Agency, a check for the sum of P61,237.50. This check
was made payable on its face to "S. C. Schwarkopf Attorney-in-Fact,
Fulton Iron Works Co., or order." After indorsing this check in the form in
which it was drawn, Schwarzkopf opened a new account with the
defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact, Fulton
Iron Works Co.," and deposited said check therein. This account remained
undisputed on the books of the bank for some two months, during which
period it had an accretion of about P130.
Meanwhile, the No. 2 account which had been established back in
January, became depleted, but the manager of the bank, in view, no
doubt, of the funds to Schwarzkopf's credit in the third account conceded
to him a credit in No. 2 account of P25,000. By June 15, 1922, said
account became overdrawn to the extend of P22, 144.39, and it was
obvious that the limit of the conceded credit would soon be reached. The
manager of the bank then intervened and requested Schwarzkopf to settle
the overdraft. To accomplish this Schwarkopf merely transferred, by
check, the money to his credit in his special account as plaintiff's attorney-
in-fact to the No. 2 account. The amount thus transferred was
P61,360.81, and the effect of the transfer was to absorb the overdraft
and place a credit balance of nearly P40,000 in No. 2 account.
Schwarzkopf then purchased a draft on New York in the amount of
$15,000, and after some delay transmitted the same by mail to the
plaintiff. This draft cost Schwarzkopf the sum of P30,375.02, and it was
the only remittance ever made by him to his client.

The principal question that arises upon the facts above stated is, whether
the defendant bank is liable to the plaintiff for the sum of P22, 144.39
which was thus applied to the payment of Schwarzkopf's personal
indebtedness resulting from his overdraft in the No. 2 account. Upon this
point the first thing to be noted is that the very form in which the third
account was carried on the books of the defendant bank was sufficient to
charge the bank with notice of the fact that the money deposited in said
account belonged to the Fulton Iron Works Co. and not to Schwarzkopf.
It is commonly said, and truly said in a legal sense, that money has no
earmarks. But bank accounts and commercial paper can have earmarks,
and these earmarks consist of the word or words which infallibly convey
to the mind notice that the money or credit represented by the account
with which they are associated or the instrument upon which they are
written rightfully belongs to some other person than the one having
control thereof. A bank cannot permit, much less require, a depositor who
is in control of a trust fund to apply any part of the same to his individual
indebtedness to the bank. The decisions to this effect are uniformly
accordant and it is believed no creditable authority to the contrary can be
produced from any source. The expression "trust fund," in this
connection, is not a technical term, and is applied in a loose sense to
indicate the situation where a bank account or negotiable securities of
any sort are under the control of a person other than the true owner. The
following decisions are instructive as illustrating different phases of the
rule above stated, the selection having been made with a view to the fact
that the cases cited are for the most part accessible in one or more series
of annotated reports; Central Nat. Bank of Baltimore vs. Conn. Mut. Life
Ins. Co., 104 U. S., 54; 26 Law. ed., 693; Union Stock Yards Nat. Bank
vs. Moore, 25 C. C. A., 150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466;
15 L. R. A., 544; Am. Trust & Banking Co. vs. Boone, 102 Ga., 202; 40
L. R. A., 250; 66 Am. St. Rep., 167; First Denton Nat. Bank vs. Kenney,
116 Md., 24; Ann. Cas. 19193B, 1337; Allen vs. Puritan Trust Co., 211
Mass., 409; L. R. A. 1915C, 518 (and note); Emerado Farmers' El. Co. vs.
Farmers' Bank, 20 N. D., 270; 29 L. R. A. (N. S.), 567; Baird vs. Lorenz
(N. D.), 61 L. R. A., 1385, 1389 (note); Walters Nat. Bank vs. Bantock,
41 Okla.,, 153; L. R. A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97
Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep., 885; Boyle vs.
BANKING | Nature of Funds Deposited | 122
Northwestern Nat. Bank of Superior, 125 Wis., 498; 1 L. R. A. (N. S.)
1110 Am. St. Rep., 851; United States Fidelity & Gy. Co. vs. Adoue, 104
Tex., 379; 37 L. R. A. (N. S.), 409; Ann. Cas. 1914B, 667; Underwood
Ltd. vs. Bank of Liverpool (1924), 1 K. B., 755.
Upon the facts before us it is evident that when credit to the extent of
P25,000 was conceded to Schwarzkopf in his personal account No. 2, the
eye of the banker was fixed upon the large amount then upon deposit to
Schwarkopf's credit in his account as attorney-in-fact; but of course, if a
bank cannot apply the money in such an account, or even permit it to be
applied, to the personal indebtedness of the fiduciary depositor, it is not
permissible for the bank to extend personal credit to such depositor upon
the faith of the trust account. From any point that the matter be viewed,
the liability of the bank is clear to the extent of P22144.39 this being the
amount derived from Schwarkopf's account as attorney-in-fact which was
absorbed by his overdraft in account No. 2 when the transfer of the
balance in the former account to the latter account was effected, in the
manner already stated.
We next proceed to consider the disposition made of the proceeds of the
third check collected by Schwarzkopf upon account of plaintiff's claim
against the Binalbagan Estate, Inc., from the Philippine National Bank.
The amount of this collection was P104, 959.60, and it was paid, on
October 11, 1922, by a cashier's check on the Philippine National Bank,
payable "to the order of S. C. Schwarzkopf, attorney-in-fact, Fulton Iron
Works Co." Upon receiving this check, Schwarzkopf indorsed it in proper
form, by writing thereon the words "S. C. Schwarzkopf, attorney-in-fact,
Fulton Iron Works Co.," to which he added another indorsement
consisting of his own name alone, and deposited the check in his personal
account No. 2 with the defendant bank. The check thus delivered to the
bank was collected by it from the Philippine National Bank in ordinary
course. Thereafter, in the course of the next few months, Schwarzkopf
withdrew, upon checks written by himself, the entire amount of the
money to his credit in account No. 2, thus misappropriating the money in
said account to his own use.

It will be noted that the money thus squandered comprised not only the
proceeds of the check last mentioned but the residue, consisting of a few
thousand pesos, which had been left in No. 2 account after the overdraft
had been paid and Schwarzkopf had remitted the draft of $15,000 to his
principal in the United States. We consider that, from a legal point of view,
the situation with respect to this money is precisely the same as that
presented with respect to the money which came into the account later
by deposit of the check for P104,959.60 above mentioned, because as to
both funds, liability is sought to be fixed upon the bank by reason of its
knowledge of the source from which said funds were derived; and in this
connection it should be noted that there is no proof showing that the
defendant bank had any knowledge of the misappropriation of this money
by Schwarzkopf other than such as might have been derived from an
inspection of its own books and the checks by which the money was paid
in and paid out.
The feature of the case now under consideration brings us, it must be
admitted, into debatable territory, but a discriminating analysis of the
legal principles involved leads to the conclusion that the defendant cannot
be held liable for money paid out by it in ordinary course on checks, in
regular form, drawn by Schwarzkopf on the No. 2 account.
The specialized function of bank is to serve as a place of deposit for
money, to keep it safely while on deposit, and to pay it out, upon demand
to the person who effected the deposit or upon his order. A bank is not a
guardian of trust funds deposited with it in the sense that it must see to
their proper application nor is it its business to pry into the uses to which
moneys on deposit in its vault are being put; and so long as it serves its
function and pays the money out in good faith to the person who
deposited it, or upon his order, without knowledge or notice that it is in
fact assisting in the misappropriation of the fund, the bank will be
protected. As is well said by the author of the monographic article on
Banks and Banking in Ruling Case Law, It would seriously interfere with
commercial transactions to charge banks with the duty of supervising the
administration of trust funds, when, in due course of business, they
receive checks and drafts in proper form drawn upon such funds in their
BANKING | Nature of Funds Deposited | 123
custody. The law imposes no such duty upon them (3 R. C. L.,
549; see also cases cited in 7 C. J., 644, 645, note 25).
There are, it is true, decisions from a few courts, deservedly held in high
esteem, to the effect that a bank makes itself an effective accomplice in
the conversion of a trust fund when, with notice of the character of such
fund, it permits the person in control thereof to deposit it in his personal
account. But the decided weight of judicial authority is to the contrary;
and it is generally held that the mere act of a bank in entering a trust
fund to the personal account of the fiduciary, knowing it to be a trust
fund, will not make the bank liable in case of the subsequent
misappropriation of the money by the fiduciary. (United States Fidelity &
Gy. Co. vs. First Nat. Bank, 18 Cal. App., 437: Goodwin vs. Am. Nat.
Bank, 48 Conn., 550; Batchelder vs. Cen. Nat. Bank of Boston, 188 Mass.,
25; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518; Gate
City Bldg. & Loan Assoc. vs. National Bank of Commerce, 126 Mo., 82;
27 L. R. A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218
N. Y., 106; Havana C. R. Co. vs. Knickerbocker Trust Co., 198 N. Y., 422;
L. R. A. 1915B, 720). The bank has the right to presume that the fiduciary
will apply a trust fund to its proper purpose, and at any rate the bank is
not required to send a courier with the money to see that it reaches a
proper destination.
In the case before us an intimate study of the checks which came into the
defendant bank against account No. 2 over a series of months, would
have led a discerning person to the conclusion that the plaintiff's money
was being squandered, but such an inference could not legitimately have
been drawn from the first few checks which were drawn upon the fund,
and it would be hard to say just where the bank, supposing its suspicions
to have been aroused, should have intervened. No such a duty is imposed.
Of course, when the bank became a party to the application of part of the
plaintiff's money to the satisfaction of the overdraft in No. 2 account, it
was directly chargeable with knowledge of the misappropriation of the
fund to the extent of the overdraft and that fact, as we have already said,
made the bank liable. But this rule cannot be extented to subsequent acts

of malversation and misappropriation committed by the fiduciary against
the real owner of the fund.
Furthermore, it is undeniable that a bank may incur liability by assisting
the fiduciary to accomplish a misappropriation, although the bank does
not actually profit by the misappropriation. A decision illustrating this
aspect of the law is found in Washborn vs. Linscott State Bank (87 Kan.,
698), where a bank, to help the treasurer of a lodge to conceal his
defalcations, permitted him to overdraw, and when his account were to
be audited, issued to him a deposit certificate for the shortage, payable
to the lodge. After the audit was made, the certificate was returned and
cancelled, and the shortage reappeared. The court held that a loan had
been made to the treasurer personally, and that the bank became liable
to the lodge upon cancelling the deposit certificate.lawphil.net
Our discussion of this phase of the case should not be concluded without
reference to Bischoff vs. Yorville Bank (218 N. Y., 106), which
undoubtedly affords some support to the contention of the appellee that
the defendant bank is liable not only for the proceeds of the last check
collected by Schwarzkopf, but for all of the money which was transferred
to account No. 2 from the account of Schawarzkopf as attorney-in-fact.
This decision comes, it must be admitted, from a court of high repute.
But we are unable to accept the court's conclusions, as applicable to the
facts before us. In the case mentioned it appeared that an executor,
named Poggenburg, having money on deposit in a certain bank to his
credit as executor, gradually withdrew about $13,000 from said deposit
by checks drawn by him, over a long period of time, in the character of
executor. These checks were indorsed by Poggenburg in his own name
simply and deposited in the defendant Yorkville Bank to his personal
credit. At the inception of this series of transactions Poggenburg was
indebted by note to the defendant and payments were made on this note
and other notes thereafter executed in favor of the bank, out of the funds
transferred as above stated. The court held, upon the facts before, it that
the defendant knew at all times that the credits created by the various
deposits through checks of the executor were assets pertaining to the
estate of which Poggenburg was executor; and from this fact, in
BANKING | Nature of Funds Deposited | 124
connection with the misapplication of part of the money to the payment
of the personal notes of Poggenburg, the court held that the defendant
bank was liable to the extent of the whole amount misappropriated by
means of the personal account.
It will be noted that this decision was made in third instance, after a trial
in first instance possibly before a jury and after the judgment against the
bank been affirmed upon appeal in the appellate division of the Supreme
Court. The prior history of the case was therefore such as to entitle the
findings of fact of the two prior courts of great weight, and these courts
had found in effect that the defendant bank had acted in bad faith. If not
explicable upon this ground, the decision in the Court of Appeals must be
considered a unique variant from accepted doctrine in this that while
repudiating the idea, favored by a few courts that the act of depositing a
trust fund in the personal accounts of the fiduciary is an effective act of
conversion on the part both of bank and fiduciary, the court nevertheless
held that the act of the bank in permitting the application of part of the
money to the personal indebtedness of the fiduciary afforded a sufficient
basis for finding the bank to have been an accomplice in the subsequent
misapplication, by the fiduciary, of other portions of the deposit. We can
accede to the first of these propositions but not to the second. In this
connection we refer to the Annotation appended to Allen vs. Puritan Trust
Co. (L. R. A. 1915C, 518, 529), where the pertinent cases are analyzed
and the conclusion stated 1 that, by the weight of authority, the placing
of a trust fund in the personal account of the fiduciary does not make the
bank liable for a subsequent misappropriation of the money by the
former. For the rest it is enough to say that there is no proof in this case
that the defendant bank had any guilty connection in fact with the
dishonest acts of Schwarzkopf, in squandering the contents of the No. 2
account after he had made his remittance of $15,000 to his principal.
In conclusion we ought to add that the legal principles involved in this
decision are not directly deducible from the provisions of the Negotiable
Instruments Law, which is in force in this jurisdiction (Act No. 2031); and
there is no provision of the Civil Code or Code of Commerce directly
bearing upon the point under consideration. The liability of the defendant
 BANKING | Nature of Funds Deposited | 125

bank, to the extent recognized in this decision proceeds upon the

fundamental idea that a creditor cannot apply to the obligation of his
debtor money which as he knows belongs to another, without the consent
of the latter, — a principle implicit in all law. We note that the attorneys
for the appellant bank have suggested in their brief that, supposing the
bank to have been an accomplice of Schwarzkopf in the misappropriation
of the plaintiff's money, its subsidiary liability was extinguished as a result
of the criminal proceedings against Schwarzkopf. This suggestion is
clearly untenable, with respect to the liability which is fixed upon the bank
by this decision.

From what has been said it follows that the appealed judgment must be
modified and the same is hereby modified by reducing the amount of the
judgment against the bank to the sum of P22,144.39 with lawful interest
from June 23, 1926 until date of payment, 2without pronouncement as to
costs.

So ordered.

ADVERSE CLAIM
G.R. No. 123498 November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with
meticulous care and utmost fidelity. We reiterate this exhortation in the
case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the
Court of Appeals (CA) Decision1 in CA-G.R. CV No. 43424 which affirmed
with modification the judgment2 of the Regional Trial Court, Branch 55,
Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the
petitioner BPI Family Bank (BPI-FB) allegedly by respondent Amado
Franco (Franco) in conspiracy with other individuals,3 some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del
Monte (SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc.
(Tevesteco) opened a savings and current account with BPI-FB. Soon
thereafter, or on August 25, 1989, First Metro Investment Corporation
(FMIC) also opened a time deposit account with the same branch of BPI-
FB with a deposit of ₱100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts,
namely, a current,4 savings,5 and time deposit,6 with BPI-FB. The current
and savings accounts were respectively funded with an initial deposit of
₱500,000.00 each, while the time deposit account had ₱1,000,000.00
with a maturity date of August 31, 1990. The total amount of
₱2,000,000.00 used to open these accounts is traceable to a check issued
by Tevesteco allegedly in consideration of Franco’s introduction of Eladio
BANKING | Nature of Funds Deposited | 126
Teves,7 who was looking for a conduit bank to facilitate Tevesteco’s
business transactions, to Jaime Sebastian, who was then BPI-FB SFDM’s
Branch Manager. In turn, the funding for the ₱2,000,000.00 check was
part of the ₱80,000,000.00 debited by BPI-FB from FMIC’s time deposit
account and credited to Tevesteco’s current account pursuant to an
Authority to Debit purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on the
Authority to Debit were forged.8 On September 4, 1989, Antonio
Ong,9 upon being shown the Authority to Debit, personally declared his
signature therein to be a forgery. Unfortunately, Tevesteco had already
effected several withdrawals from its current account (to which had been
credited the ₱80,000,000.00 covered by the forged Authority to Debit)
amounting to ₱37,455,410.54, including the ₱2,000,000.00 paid to
Franco.
On September 8, 1989, impelled by the need to protect its interests in
light of FMIC’s forgery claim, BPI-FB, thru its Senior Vice-President,
Severino Coronacion, instructed Jesus Arangorin10 to debit Franco’s
savings and current accounts for the amounts remaining
therein.11 However, Franco’s time deposit account could not be debited
due to the capacity limitations of BPI-FB’s computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB
current account were dishonored upon presentment for payment, and
stamped with a notation "account under garnishment." Apparently,
Franco’s current account was garnished by virtue of an Order of
Attachment issued by the Regional Trial Court of Makati (Makati RTC) in
Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-FB
against Franco et al.,14 to recover the ₱37,455,410.54 representing
Tevesteco’s total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for
payment at BPI-FB prior to Franco’s receipt of notice that his accounts
were under garnishment.15 In fact, at the time the Notice of Garnishment

dated September 27, 1989 was served on BPI-FB, Franco had yet to be
impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded
in the Makati case.16 Immediately, upon receipt of such copy, Franco filed
a Motion to Discharge Attachment which the Makati RTC granted on May
16, 1990. The Order Lifting the Order of Attachment was served on BPI-
FB on even date, with Franco demanding the release to him of the funds
in his savings and current accounts. Jesus Arangorin, BPI-FB’s new
manager, could not forthwith comply with the demand as the funds, as
previously stated, had already been debited because of FMIC’s forgery
claim. As such, BPI-FB’s computer at the SFDM Branch indicated that the
current account record was "not on file."
With respect to Franco’s savings account, it appears that Franco agreed
to an arrangement, as a favor to Sebastian, whereby ₱400,000.00 from
his savings account was temporarily transferred to Domingo Quiaoit’s
savings account, subject to its immediate return upon issuance of a
certificate of deposit which Quiaoit needed in connection with his visa
application at the Taiwan Embassy. As part of the arrangement, Sebastian
retained custody of Quiaoit’s savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Franco’s
deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-
FB deducted the amount of ₱63,189.00 from the remaining balance of the
time deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had
already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of
₱80,000,000.00 debited from its account.17 The case eventually reached
this Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment
Corporation,18 we upheld the finding of the courts below that BPI-FB failed
to exercise the degree of diligence required by the nature of its obligation
BANKING | Nature of Funds Deposited | 127
to treat the accounts of its depositors with meticulous care. Thus, BPI-FB
was found liable to FMIC for the debited amount in its time deposit. It was
ordered to pay ₱65,332,321.99 plus interest at 17% per annum from
August 29, 1989 until fully restored. In turn, the 17% shall itself earn
interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.),19 recipients of a ₱500,000.00 check proceeding
from the ₱80,000,000.00 mistakenly credited to Tevesteco, likewise filed
suit. Buenaventura et al., as in the case of Franco, were also prevented
from effecting withdrawals20 from their current account with BPI-FB,
Bonifacio Market, Edsa, Caloocan City Branch. Likewise, when the case
was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,21 we ruled that BPI-FB had no right to freeze
Buenaventura, et al.’s accounts and adjudged BPI-FB liable therefor, in
addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those
believed to be the perpetrators of the multi-million peso scam.22 In the
criminal case, Franco, along with the other accused, except for Manuel
Bienvenida who was still at large, were acquitted of the crime of Estafa
as defined and penalized under Article 351, par. 2(a) of the Revised Penal
Code.23 However, the civil case24 remains under litigation and the
respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to
unfreeze his accounts and release his deposits therein, the latter filed on
June 4, 1990 with the Manila RTC the subject suit. In his complaint,
Franco prayed for the following reliefs: (1) the interest on the remaining
balance25 of his current account which was eventually released to him on
October 31, 1991; (2) the balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to him which had been deducted
when he pre-terminated his time deposit account; and (4) the payment
of actual, moral and exemplary damages, as well as attorney’s fees.

BPI-FB traversed this complaint, insisting that it was correct in freezing
the accounts of Franco and refusing to release his deposits, claiming that
it had a better right to the amounts which consisted of part of the money
allegedly fraudulently withdrawn from it by Tevesteco and ending up in
Franco’s accounts. BPI-FB asseverated that the claimed consideration of
₱2,000,000.00 for the introduction facilitated by Franco between George
Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the
other, spoke volumes of Franco’s participation in the fraudulent
transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive
portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in
favor of [Franco] and against [BPI-FB], ordering the latter to pay to the
former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of
₱450,000.00 from May 18, 1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account
as of May 18, 1990, together with the interest thereon in accordance with
the bank’s guidelines on the payment therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and
legal anchor. Costs against [BPI-FB]. SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals
before the CA. Franco confined his appeal to the Manila RTC’s denial of
his claim for moral and exemplary damages, and the diminutive award of
attorney’s fees. In affirming with modification the lower court’s decision,
the appellate court decreed, to wit:
BANKING | Nature of Funds Deposited | 128
WHEREFORE, foregoing considered, the appealed decision is hereby
AFFIRMED with modification ordering [BPI-FB] to pay [Franco]
₱63,189.00 representing the interest deducted from the time deposit of
plaintiff-appellant. ₱200,000.00 as moral damages and ₱100,000.00 as
exemplary damages, deleting the award of nominal damages (in view of
the award of moral and exemplary damages) and increasing the award of
attorney’s fees from ₱30,000.00 to ₱75,000.00. Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1)
Franco had a better right to the deposits in the subject accounts which
are part of the proceeds of a forged Authority to Debit; (2) Franco is
entitled to interest on his current account; (3) Franco can recover the
₱400,000.00 deposit in Quiaoit’s savings account; (4) the dishonor of
Franco’s checks was not legally in order; (5) BPI-FB is liable for interest
on Franco’s time deposit, and for moral and exemplary damages; and (6)
BPI-FB’s counter-claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-
FB cannot unilaterally freeze Franco’s accounts and preclude him from
withdrawing his deposits. However, contrary to the appellate court’s
ruling, we hold that Franco is not entitled to unearned interest on the time
deposit as well as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Franco’s
accounts, BPI-FB urges us that the legal consequence of FMIC’s forgery
claim is that the money transferred by BPI-FB to Tevesteco is its own,
and considering that it was able to recover possession of the same when
the money was redeposited by Franco, it had the right to set up its
ownership thereon and freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner of personal
property who regains possession after it is stolen, and to illustrate this
point, BPI-FB gives the following example: where X’s television set is
stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts

possession of the TV set to X, the latter would have the right to keep
possession of the property and preclude Z from recovering possession
thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code,
which provides:
Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale, the
owner cannot obtain its return without reimbursing the price paid
therefor.
BPI-FB’s argument is unsound. To begin with, the movable property
mentioned in Article 559 of the Civil Code pertains to a specific or
determinate thing.30 A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the
same kind.31
In this case, the deposit in Franco’s accounts consists of money which,
albeit characterized as a movable, is generic and fungible.32 The quality
of being fungible depends upon the possibility of the property, because of
its nature or the will of the parties, being substituted by others of the
same kind, not having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been
unlawfully deprived of a movable to recover the exact same thing from
the current possessor, BPI-FB simply claims ownership of the equivalent
amount of money, i.e., the value thereof, which it had mistakenly debited
from FMIC’s account and credited to Tevesteco’s, and subsequently traced
to Franco’s account. In fact, this is what BPI-FB did in filing the Makati
Case against Franco, et al. It staked its claim on the money itself which
passed from one account to another, commencing with the forged
Authority to Debit.
BANKING | Nature of Funds Deposited | 129
It bears emphasizing that money bears no earmarks of peculiar
ownership,34 and this characteristic is all the more manifest in the instant
case which involves money in a banking transaction gone awry. Its
primary function is to pass from hand to hand as a medium of exchange,
without other evidence of its title.35 Money, which had passed through
various transactions in the general course of banking business, even if of
traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate
personal property, BPI-FB’s illustrative example, ostensibly based on
Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts
of Franco, but not as a legal consequence of its unauthorized transfer of
FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently forgets that
the deposit of money in banks is governed by the Civil Code provisions
on simple loan or mutuum.36 As there is a debtor-creditor relationship
between a bank and its depositor, BPI-FB ultimately acquired ownership
of Franco’s deposits, but such ownership is coupled with a corresponding
obligation to pay him an equal amount on demand.37 Although BPI-FB
owns the deposits in Franco’s accounts, it cannot prevent him from
demanding payment of BPI-FB’s obligation by drawing checks against his
current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current
account, he had every right as creditor to expect that those checks would
be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the
accounts of Franco based on its mere suspicion that the funds therein
were proceeds of the multi-million peso scam Franco was allegedly
involved in. To grant BPI-FB, or any bank for that matter, the right to
take whatever action it pleases on deposits which it supposes are derived
from shady transactions, would open the floodgates of public distrust in
the banking industry.

Our pronouncement in Simex International (Manila), Inc. v. Court of
Appeals38 continues to resonate, thus:
The banking system is an indispensable institution in the modern world
and plays a vital role in the economic life of every civilized nation.
Whether as mere passive entities for the safekeeping and saving of money
or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence. Thus, even
the humble wage-earner has not hesitated to entrust his life’s savings to
the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal
faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of
ordinary expenses. x x x.
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 directs. A blunder on the part of
the bank, such as the dishonor of the 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. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty
bound to know the signatures of its customers. Having failed to detect
the forgery in the Authority to Debit and in the process inadvertently
facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability
BANKING | Nature of Funds Deposited | 130
thereon to Franco and the other payees of checks issued by Tevesteco,
or prevent withdrawals from their respective accounts without the
appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the
authenticity of the signature in the Authority to Debit, effected the
transfer of ₱80,000,000.00 from FMIC’s to Tevesteco’s account, when
FMIC’s account was a time deposit and it had already paid advance
interest to FMIC. Considering that there is as yet no indubitable evidence
establishing Franco’s participation in the forgery, he remains an innocent
party. As between him and BPI-FB, the latter, which made possible the
present predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Franco’s current
account, BPI-FB argues that its non-compliance with the Makati RTC’s
Order Lifting the Order of Attachment and the legal consequences thereof,
is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the
appellate court in this respect. The Manila RTC’s order to pay interests on
Franco’s current account arose from BPI-FB’s unjustified refusal to comply
with its obligation to pay Franco pursuant to their contract of mutuum. In
other words, from the time BPI-FB refused Franco’s demand for the
release of the deposits in his current account, specifically, from May 17,
1990, interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the
legal consequences of BPI-FB’s non-compliance with the Order Lifting the
Order of Attachment. However, such authority does not preclude the
Manila RTC from ruling on BPI-FB’s liability to Franco for payment of
interest based on its continued and unjustified refusal to perform a
contractual obligation upon demand. After all, this was the core issue
raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we
find no reason to depart from the factual findings of both the Manila RTC
and the CA.

Noteworthy is the fact that Quiaoit himself testified that the deposits in
his account are actually owned by Franco who simply accommodated
Jaime Sebastian’s request to temporarily transfer ₱400,000.00 from
Franco’s savings account to Quiaoit’s account.40 His testimony cannot be
characterized as hearsay as the records reveal that he had personal
knowledge of the arrangement made between Franco, Sebastian and
himself.41
BPI-FB makes capital of Franco’s belated allegation relative to this
particular arrangement. It insists that the transaction with Quiaoit was
not specifically alleged in Franco’s complaint before the Manila RTC.
However, it appears that BPI-FB had impliedly consented to the trial of
this issue given its extensive cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of
evidence.— When issues not raised by the pleadings are tried with the
express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of
the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party
at any time, even after judgment; but failure to amend does not affect
the result of the trial of these issues. If evidence is objected to at the trial
on the ground that it is now within the issues made by the pleadings, the
court may allow the pleadings to be amended and shall do so with
liberality if the presentation of the merits of the action and the ends of
substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco
to recover the ₱400,000.00 begs the issue. To reiterate, Quiaoit,
testifying during the trial, unequivocally disclaimed ownership of the
funds in his account, and pointed to Franco as the actual owner thereof.
Clearly, Franco’s action for the recovery of his deposits appropriately
covers the deposits in Quiaoit’s account.
BANKING | Nature of Funds Deposited | 131
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that
the dishonor of Franco’s checks respectively dated September 11 and 18,
1989 was legally in order in view of the Makati RTC’s supplemental writ
of attachment issued on September 14, 1989. It posits that as the party
that applied for the writ of attachment before the Makati RTC, it need not
be served with the Notice of Garnishment before it could place Franco’s
accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever
but transparent ploy to circumvent Section 4,42 Rule 13 of the Rules of
Court. It should be noted that the strict requirement on service of court
papers upon the parties affected is designed to comply with the
elementary requisites of due process. Franco was entitled, as a matter of
right, to notice, if the requirements of due process are to be observed.
Yet, he received a copy of the Notice of Garnishment only on September
27, 1989, several days after the two checks he issued were dishonored
by BPI-FB on September 20 and 21, 1989. Verily, it was premature for
BPI-FB to freeze Franco’s accounts without even awaiting service of the
Makati RTC’s Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of
attachment cannot be made without including in the main suit the owner
of the property attached by virtue thereof. Section 5, Rule 13 of the Rules
of Court specifically provides that "no levy or attachment pursuant to the
writ issued x x x shall be enforced unless it is preceded, or
contemporaneously accompanied, by service of summons, together with
a copy of the complaint, the application for attachment, on the defendant
within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The
Makati RTC had yet to acquire jurisdiction over the person of Franco when
BPI-FB garnished his accounts.43 Effectively, therefore, the Makati RTC
had no authority yet to bind the deposits of Franco through the writ of
attachment, and consequently, there was no legal basis for BPI-FB to
dishonor the checks issued by Franco.

Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such
liable for the advance interest it deducted from Franco’s time deposit
account, and for moral as well as exemplary damages, we find it proper
to reinstate the ruling of the trial court, and allow only the recovery of
nominal damages in the amount of ₱10,000.00. However, we retain the
CA’s award of ₱75,000.00 as attorney’s fees.
In granting Franco’s prayer for interest on his time deposit account and
for moral and exemplary damages, the CA attributed bad faith to BPI-FB
because it (1) completely disregarded its obligation to Franco; (2)
misleadingly claimed that Franco’s deposits were under garnishment; (3)
misrepresented that Franco’s current account was not on file; and (4)
refused to return the ₱400,000.00 despite the fact that the ostensible
owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which
provides:
Article 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural
and probable consequences of the breach of the obligation, and which the
parties have foreseen or could have reasonable foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the
non-performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of
self-protection and not out of malevolence or ill will. BPI-FB was not in
the corrupt state of mind contemplated in Article 2201 and should not be
held liable for all damages now being imputed to it for its breach of
obligation. For the same reason, it is not liable for the unearned interest
on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of
BANKING | Nature of Funds Deposited | 132
wrong; it partakes of the nature of fraud.44 We have held that it is a
breach of a known duty through some motive of interest or ill will.45 In
the instant case, we cannot attribute to BPI-FB fraud or even a motive of
self-enrichment. As the trial court found, there was no denial whatsoever
by BPI-FB of the existence of the accounts. The computer-generated
document which indicated that the current account was "not on file"
resulted from the prior debit by BPI-FB of the deposits. The remedy of
freezing the account, or the garnishment, or even the outright refusal to
honor any transaction thereon was resorted to solely for the purpose of
holding on to the funds as a security for its intended court action, 46 and
with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad
faith,47 moral damages cannot be awarded; and that the adverse result
of an action does not per se make the action wrongful, or the party liable
for it. One may err, but error alone is not a ground for granting such
damages.48
An award of moral damages contemplates the existence of the following
requisites: (1) there must be an injury clearly sustained by the claimant,
whether physical, mental or psychological; (2) there must be a culpable
act or omission factually established; (3) the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the
claimant; and (4) the award for damages is predicated on any of the cases
stated in Article 2219 of the Civil Code.49
Franco could not point to, or identify any particular circumstance in Article
2219 of the Civil Code,50 upon which to base his claim for moral
damages.1âwphi1
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral
damages under Article 2220 of the Civil Code for breach of contract.51
We also deny the claim for exemplary damages. Franco should show that
he is entitled to moral, temperate, or compensatory damages before the
court may even consider the question of whether exemplary damages
 BANKING | Nature of Funds Deposited | 133

should be awarded to him.52 As there is no basis for the award of moral

damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to

litigate,53 we, however, find that Franco is entitled to reasonable
attorney’s fees for having been compelled to go to court in order to assert
his right. Thus, we affirm the CA’s grant of ₱75,000.00 as attorney’s fees.

Attorney’s fees may be awarded when a party is compelled to litigate or

incur expenses to protect his interest,54 or when the court deems it just
and equitable.55 In the case at bench, BPI-FB refused to unfreeze the
deposits of Franco despite the Makati RTC’s Order Lifting the Order of
Attachment and Quiaoit’s unwavering assertion that the ₱400,000.00 was
part of Franco’s savings account. This refusal constrained Franco to incur
expenses and litigate for almost two (2) decades in order to protect his
interests and recover his deposits. Therefore, this Court deems it just and
equitable to grant Franco ₱75,000.00 as attorney’s fees. The award is
reasonable in view of the complexity of the issues and the time it has
taken for this case to be resolved.56

Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila

RTC’s ruling, as affirmed by the CA, that BPI-FB is not entitled to recover
₱3,800,000.00 as actual damages. BPI-FB’s alleged loss of profit as a
result of Franco’s suit is, as already pointed out, of its own making.
Accordingly, the denial of its counter-claim is in order.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals

Decision dated November 29, 1995 is AFFIRMED with the MODIFICATION
that the award of unearned interest on the time deposit and of moral and
exemplary damages is DELETED.

No pronouncement as to costs.

SO ORDERED.

ADVERSE CLAIM
G.R. No. 171845 October 10, 2012
SPOUSES GODFREY and GERARDINA SERFINO, Petitioners,
vs.
FAR EAST BANK AND TRUST COMPANY, INC., now BANK OF THE
PHILIPPINE ISLANDS, Respondent.
BRION, J.:
Before the Court is a petition for review on certiorari, 1 filed under Rule
45 of the Rules of Court, assailing the decision2 dated February 23, 2006
of the Regional Trial Court (RTC) of Bacolod City, Branch 41, in Civil Case
No. 95-9344.
FACTUAL ANTECEDENTS
The present case traces its roots to the compromise judgment dated
October 24, 19953 of the RTC of Bacolod City, Branch 47, in Civil Case No.
95-9880. Civil Case No. 95-9880 was an action for collection of sum of
money instituted by the petitioner spouses Godfrey and Gerardina Serfino
(collectively, spouses Serfino) against the spouses Domingo and
Magdalena Cortez (collectively, spouses Cortez). By way of settlement,
the spouses Serfino and the spouses Cortez executed a compromise
agreement on October 20, 1995, in which the spouses Cortez
acknowledged their indebtedness to the spouses Serfino in the amount of
₱ 108,245.71. To satisfy the debt, Magdalena bound herself "to pay in
full the judgment debt out of her retirement benefits[.]"4 Payment
of the debt shall be made one (1) week after Magdalena has received her
retirement benefits from the Government Service Insurance System
(GSIS). In case of default, the debt may be executed against any of the
properties of the spouses Cortez that is subject to execution, upon motion
of the spouses Serfino.5 After finding that the compromise agreement was
not contrary to law, morals, good custom, public order or public policy,
the RTC approved the entirety of the parties’ agreement and issued a
compromise judgment based thereon.6 The debt was later reduced to ₱
155,000.00 from ₱ 197,000.00 (including interest), with the promise that
BANKING | Nature of Funds Deposited | 134
the spouses Cortez would pay in full the judgment debt not later than
April 23, 1996.7
No payment was made as promised. Instead, Godfrey discovered that
Magdalena deposited her retirement benefits in the savings account of
her daughter-in-law, Grace Cortez, with the respondent, Far East Bank
and Trust Company, Inc. (FEBTC). As of April 23, 1996, Grace’s savings
account with FEBTC amounted to ₱ 245,830.37, the entire deposit coming
from Magdalena’s retirement benefits.8 That same day, the spouses
Serfino’s counsel sent two letters to FEBTC informing the bank
that the deposit in Grace’s name was owned by the spouses
Serfino by virtue of an assignment made in their favor by the
spouses Cortez. The letter requested FEBTC to prevent the delivery of
the deposit to either Grace or the spouses Cortez until its actual ownership
has been resolved in court.
On April 25, 1996, the spouses Serfino instituted Civil Case No. 95- 9344
against the spouses Cortez, Grace and her husband, Dante Cortez, and
FEBTC for the recovery of money on deposit and the payment of
damages, with a prayer for preliminary attachment.
On April 26, 1996, Grace withdrew ₱ 150,000.00 from her savings
account with FEBTC. On the same day, the spouses Serfino sent
another letter to FEBTC informing it of the pending action; attached to
the letter was a copy of the complaint filed as Civil Case No. 95-9344.
During the pendency of Civil Case No. 95-9344, the spouses Cortez
manifested that they were turning over the balance of the deposit in
FEBTC (amounting to ₱ 54,534.00) to the spouses Serfino as partial
payment of their obligation under the compromise judgment. The RTC
issued an order dated July 30, 1997, authorizing FEBTC to turn over the
balance of the deposit to the spouses Serfino.
On February 23, 2006, the RTC issued the assailed decision (a) finding
the spouses Cortez, Grace and Dante liable for fraudulently diverting the
amount due the spouses Serfino, but (b) absolving FEBTC from any
liability for allowing Grace to withdraw the deposit. The RTC

declared that FEBTC was not a party to the compromise judgment; FEBTC
was thus not chargeable with notice of the parties’ agreement, as there
was no valid court order or processes requiring it to withhold payment of
the deposit. Given the nature of bank deposits, FEBTC was primarily
bound by its contract of loan with Grace. There was, therefore, no legal
justification for the bank to refuse payment of the account,
notwithstanding the claim of the spouses Serfino as stated in their three
letters.
THE PARTIES’ ARGUMENTS
The spouses Serfino appealed the RTC’s ruling absolving FEBTC
from liability for allowing the withdrawal of the deposit. They
allege that the RTC cited no legal basis for declaring that only a court
order or process can justify the withholding of the deposit in Grace’s
name. Since FEBTC was informed of their adverse claim after they sent
three letters, they claim that:
Upon receipt of a notice of adverse claim in proper form, it becomes the
duty of the bank to: 1. Withhold payment of the deposit until there is a
reasonable opportunity to institute legal proceedings to contest
ownership; and 2) give prompt notice of the adverse claim to the
depositor. The bank may be held liable to the adverse claimant if it
disregards the notice of adverse claim and pays the depositor.
When the bank has reasonable notice of a bona fide claim that
money deposited with it is the property of another than the
depositor, it should withhold payment until there is reasonable
opportunity to institute legal proceedings to contest the
ownership.9 (emphases and underscoring supplied)
Aside from the three letters, FEBTC should be deemed bound by the
compromise judgment, since Article 1625 of the Civil Code states that an
assignment of credit binds third persons if it appears in a public
instrument.10 They conclude that FEBTC, having been notified of their
adverse claim, should not have allowed Grace to withdraw the deposit.
BANKING | Nature of Funds Deposited | 135
While they acknowledged that bank deposits are governed by the Civil
Code provisions on loan, the spouses Serfino allege that the provisions on
voluntary deposits should apply by analogy in this case, particularly
Article 1988 of the Civil Code, which states:
Article 1988. The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may have
been fixed.
This provision shall not apply when the thing is judicially attached
while in the depositary’s possession, or should he have been notified
of the opposition of a third person to the return or the removal of
the thing deposited. In these cases, the depositary must immediately
inform the depositor of the attachment or opposition.
Based on Article 1988 of the Civil Code, the depository is not obliged to
return the thing to the depositor if notified of a third party’s adverse claim.
By allowing Grace to withdraw the deposit that is due them under the
compromise judgment, the spouses Serfino claim that FEBTC
committed an actionable wrong that entitles them to the payment
of actual and moral damages.
FEBTC, on the other hand, insists on the correctness of the RTC ruling. It
claims that it is not bound by the compromise judgment, but only by its
contract of loan with its depositor. As a loan, the bank deposit is owned
by the bank; hence, the spouses Serfino’s claim of ownership over it is
erroneous.
Based on these arguments, the case essentially involves a determination
of the obligation of banks to a third party who claims rights over
a bank deposit standing in the name of another.
THE COURT’S RULING
We find the petition unmeritorious and see no reason to reverse the RTC’s
ruling.

Claim for actual damages not meritorious because there could be
no pecuniary loss that should be compensated if there was no
assignment of credit
The spouses Serfino’s claim for damages against FEBTC is premised on
their claim of ownership of the deposit with FEBTC. The deposit consists
of Magdalena’s retirement benefits, which the spouses Serfino claim to
have been assigned to them under the compromise judgment. That the
retirement benefits were deposited in Grace’s savings account with FEBTC
supposedly did not divest them of ownership of the amount, as "the
money already belongs to the [spouses Serfino] having been absolutely
assigned to them and constructively delivered by virtue of the x x x public
instrument[.]"11 By virtue of the assignment of credit, the spouses
Serfino claim ownership of the deposit, and they posit that FEBTC was
duty bound to protect their right by preventing the withdrawal of the
deposit since the bank had been notified of the assignment and of their
claim.
We find no basis to support the spouses Serfino’s claim of
ownership of the deposit.
"An assignment of credit is an agreement by virtue of which the owner of
a credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor. It may be in the form of sale,
but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person."12 As a dation in
payment, the assignment of credit operates as a mode of
extinguishing the obligation;13 the delivery and transmission of
ownership of a thing (in this case, the credit due from a third person) by
the debtor to the creditor is accepted as the equivalent of the performance
of the obligation.14
BANKING | Nature of Funds Deposited | 136
The terms of the compromise judgment, however, did not convey an
intent to equate the assignment of Magdalena’s retirement benefits (the
credit) as the equivalent of the payment of the debt due the spouses
Serfino (the obligation). There was actually no assignment of credit; if at
all, the compromise judgment merely identified the fund from
which payment for the judgment debt would be sourced:
(c) That before the plaintiffs file a motion for execution of the decision or
order based [on this] Compromise Agreement, the defendant,
Magdalena Cortez undertake[s] and bind[s] herself to pay in full
the judgment debt out of her retirement benefits as Local
[T]reasury Operation Officer in the City of Bacolod, Philippines, upon
which full payment, the plaintiffs waive, abandon and relinquish
absolutely any of their claims for attorney’s fees stipulated in the
Promissory Note (Annex "A" to the Complaint).15 [emphasis ours]
Only when Magdalena has received and turned over to the spouses
Serfino the portion of her retirement benefits corresponding to the debt
due would the debt be deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay
the loan was extinguished by the execution of the deeds of assignment.
The Court ruled in the affirmative, given that, in the deeds involved, the
respondent (the debtor) assigned to the petitioner (the creditor) her
credits "to make good" the balance of her obligation; the parties agreed
to relieve the respondent of her obligation to pay the balance of her
account, and for the petitioner to collect the same from the respondent’s
debtors.17 The Court concluded that the respondent’s obligation to pay the
balance of her accounts with the petitioner was extinguished, pro tanto,
by the deeds of assignment of credit executed by the respondent in favor
of the petitioner.18
In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalena’s retirement
benefits as the fund from which payment shall be sourced. That the
compromise agreement authorizes recourse in case of default on other

executable properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment of
Magdalena’s credit with the GSIS that would have extinguished the
obligation.
The compromise judgment in this case also did not give the supposed
assignees, the spouses Serfino, the power to enforce Magdalena’s credit
against the GSIS. In fact, the spouses Serfino are prohibited from
enforcing their claim until after the lapse of one (1) week from
Magdalena’s receipt of her retirement benefits:
(d) That the plaintiffs shall refrain from having the judgment based upon
this Compromise Agreement executed until after one (1) week from
receipt by the defendant, Magdalena Cortez of her retirement benefits
from the [GSIS] but fails to pay within the said period the defendants’
judgment debt in this case, in which case [this] Compromise Agreement
[may be] executed upon any property of the defendants that are subject
to execution upon motion by the plaintiffs.19
An assignment of credit not only entitles the assignee to the credit itself,
but also gives him the power to enforce it as against the debtor of the
assignor.
Since no valid assignment of credit took place, the spouses Serfino cannot
validly claim ownership of the retirement benefits that were deposited
with FEBTC. Without ownership rights over the amount, they
suffered no pecuniary loss that has to be compensated by actual
damages. The grant of actual damages presupposes that the claimant
suffered a duly proven pecuniary loss.20
Claim for moral damages not meritorious because no duty exists
on the part of the bank to protect interest of third person claiming
deposit in the name of another
Under Article 2219 of the Civil Code, moral damages are recoverable for
acts referred to in Article 21 of the Civil Code. 21 Article 21 of the Civil
Code, in conjunction with Article 19 of the Civil Code, is part of the cause
BANKING | Nature of Funds Deposited | 137
of action known in this jurisdiction as "abuse of rights." The elements of
abuse of rights are: (a) there is a legal right or duty; (b) exercised in
bad faith; and (c) for the sole intent of prejudicing or injuring another.
The spouses Serfino invoke American common law that imposes a duty
upon a bank receiving a notice of adverse claim to the fund in a
depositor’s account to freeze the account for a reasonable length
of time, sufficient to allow the adverse claimant to institute legal
proceedings to enforce his right to the fund.22 In other words, the
bank has a duty not to release the deposits unreasonably early after a
third party makes known his adverse claim to the bank deposit.
Acknowledging that no such duty is imposed by law in this jurisdiction,
the spouses Serfino ask the Court to adopt this foreign rule.23
To adopt the foreign rule, however, goes beyond the power of this Court
to promulgate rules governing pleading, practice and procedure in all
courts.24 The rule reflects a matter of policy that is better
addressed by the other branches of government, particularly,
the Bangko Sentral ng Pilipinas, which is the agency that supervises the
operations and activities of banks, and which has the power to issue "rules
of conduct or the establishment of standards of operation for uniform
application to all institutions or functions covered[.]" 25 To adopt this rule
will have significant implications on the banking industry and practices,
as the American experience has shown. Recognizing that the rule
imposing duty on banks to freeze the deposit upon notice of adverse claim
adopts a policy adverse to the bank and its functions, and opens it to
liability to both the depositor and the adverse claimant,26 many American
states have since adopted adverse claim statutes that shifted or, at least,
equalized the burden. Essentially, these statutes do not impose a duty on
banks to freeze the deposit upon a mere notice of adverse claim; they
first require either a court order or an indemnity bond.27
In the absence of a law or a rule binding on the Court, it has no option
but to uphold the existing policy that recognizes the fiduciary nature of
banking. It likewise rejects the adoption of a judicially-imposed rule giving
third parties with unverified claims against the deposit of another a better
 BANKING | Nature of Funds Deposited | 138

right over the deposit. As current laws provide, the bank’s contractual
relations are with its depositor, not with the third party;28 "a bank is under
obligation to treat the accounts of its depositors with meticulous care and
always to have in mind the fiduciary nature of its relationship with
them."29 In the absence of any positive duty of the bank to an adverse
claimant, there could be no breach that entitles the latter to moral
damages.

WHEREFORE, in view of the foregoing, the petition for review

on certiorari is DENIED, and the decision dated February 23, 2006 of the
Regional Trial Court of Bacolod City, Branch 41, in Civil Case No. 95-9344
is AFFIRMED. Costs against the petitioners.

SO ORDERED.

GARNISHMENT
G.R. No. 94723 August 21, 1997
KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father
and Natural Guardian, and Spouses FEDERICO N. SALVACION, JR., and
EVELINA E. SALVACION, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING
CORPORATION and GREG BARTELLI y NORTHCOTT, respondents.
TORRES, JR., J.:
In our predisposition to discover the "original intent" of a statute, courts
become the unfeeling pillars of the status quo. Ligle do we realize that
statutes or even constitutions are bundles of compromises thrown our
way by their framers. Unless we exercise vigilance, the statute may
already be out of tune and irrelevant to our day.
The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued
restraining the respondents from applying and enforcing Section 113 of
Central Bank Circular No. 960;
b.) After hearing, judgment be rendered:
1.) Declaring the respective rights and duties of petitioners and
respondents;
2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to
the provisions of the Constitution, hence void; because its provision that
"Foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever
i.) has taken away the right of petitioners to have the bank deposit of
defendant Greg Bartelli y Northcott garnished to satisfy the judgment
BANKING | Nature of Funds Deposited | 139
rendered in petitioners' favor in violation of substantive due process
guaranteed by the Constitution;
ii.) has given foreign currency depositors an undue favor or a class
privilege in violation of the equal protection clause of the Constitution;
iii.) has provided a safe haven for criminals like the herein respondent
Greg Bartelli y Northcott since criminals could escape civil liability for their
wrongful acts by merely converting their money to a foreign currency and
depositing it in a foreign currency deposit account with an authorized
bank.
The antecedent facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist,
coaxed and lured petitioner Karen Salvacion, then 12 years old to go with
him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for
four days, or up to February 7, 1989 and was able to rape the child once
on February 4, and three times each day on February 5, 6, and 7, 1989.
On February 7, 1989, after policemen and people living nearby, rescued
Karen, Greg Bartelli was arrested and detained at the Makati Municipal
Jail. The policemen recovered from Bartelli the following items: 1.) Dollar
Check No. 368, Control No. 021000678-1166111303, US 3,903.20; 2.)
COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account
— China Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.)
Philippine Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll
(Teddy Bear) used in seducing the complainant.
On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed
against Greg Bartelli, Criminal Case No. 801 for Serious Illegal Detention
and Criminal Cases Nos. 802, 803, 804, and 805 for four (4) counts of
Rape. On the same day, petitioners filed with the Regional Trial Court of
Makati Civil Case No. 89-3214 for damages with preliminary attachment
against Greg Bartelli. On February 24, 1989, the day there was a
scheduled hearing for Bartelli's petition for bail the latter escaped from
jail.

On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte
Motion for the Issuance of Warrant of Arrest and Hold Departure Order.
Pending the arrest of the accused Greg Bartelli y Northcott, the criminal
cases were archived in an Order dated February 28, 1989.
Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated
February 22, 1989 granting the application of herein petitioners, for the
issuance of the writ of preliminary attachment. After petitioners gave
Bond No. JCL (4) 1981 by FGU Insurance Corporation in the amount of
P100,000.00, a Writ of Preliminary Attachment was issued by the trial
court on February 28, 1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of
Garnishment on China Banking Corporation. In a letter dated March 13,
1989 to the Deputy Sheriff of Makati, China Banking Corporation invoked
Republic Act No. 1405 as its answer to the notice of garnishment served
on it. On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman
sent his reply to China Banking Corporation saying that the garnishment
did not violate the secrecy of bank deposits since the disclosure is merely
incidental to a garnishment properly and legally made by virtue of a court
order which has placed the subject deposits in custodia legis. In answer
to this letter of the Deputy Sheriff of Makati, China Banking Corporation,
in a letter dated March 20, 1989, invoked Section 113 of Central Bank
Circular No. 960 to the effect that the dollar deposits or defendant Greg
Bartelli are exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body, whatsoever.
This prompted the counsel for petitioners to make an inquiry with the
Central Bank in a letter dated April 25, 1989 on whether Section 113 of
CB Circular No. 960 has any exception or whether said section has been
repealed or amended since said section has rendered nugatory the
substantive right of the plaintiff to have the claim sought to be enforced
by the civil action secured by way of the writ of preliminary attachment
as granted to the plaintiff under Rule 57 of the Revised Rules of Court.
The Central Bank responded as follows:
BANKING | Nature of Funds Deposited | 140
May 26, 1989
Ms. Erlinda S. Carolino
12 Pres. Osmena Avenue
South Admiral Village
Paranaque, Metro Manila
Dear Ms. Carolino:
This is in reply to your letter dated April 25, 1989 regarding your inquiry
on Section 113, CB Circular No. 960 (1983).
The cited provision is absolute in application. It does not admit of any
exception, nor has the same been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the
country's banking system which would help in the development of the
economy. There is no intention to render futile the basic rights of a person
as was suggested in your subject letter. The law may be harsh as some
perceive it, but it is still the law. Compliance is, therefore, enjoined.
Very truly yours,
(SGD) AGAPITO S. FAJARDO
Director1
Meanwhile, on April 10, 1989, the trial court granted petitioners' motion
for leave to serve summons by publication in the Civil Case No. 89-3214
entitled "Karen Salvacion, et al. vs. Greg Bartelli y Northcott." Summons
with the complaint was a published in the Manila Times once a week for
three consecutive weeks. Greg Bartelli failed to file his answer to the
complaint and was declared in default on August 7, 1989. After hearing
the case ex-parte, the court rendered judgment in favor of petitioners on
March 29, 1990, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and
against defendant, ordering the latter:

1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral
damages;
2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and
Evelina E. Salvacion the amount of P150,000.00 each or a total of
P300,000.00 for both of them;
3. To pay plaintiffs exemplary damages of P100,000.00; and
4. To pay attorney's fees in an amount equivalent to 25% of the total
amount of damages herein awarded;
5. To pay litigation expenses of P10,000.00; plus
6. Costs of the suit. SO ORDERED.
The heinous acts of respondent Greg Bartelli which gave rise to the award
were related in graphic detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the municipal jail of
Makati but was able to escape therefrom on February 24, 1989 as per
report of the Jail Warden of Makati to the Presiding Judge, Honorable
Manuel M. Cosico of the Regional Trial Court of Makati, Branch 136, where
he was charged with four counts of Rape and Serious Illegal Detention
(Crim. Cases Nos. 802 to 805). Accordingly, upon motion of plaintiffs,
through counsel, summons was served upon defendant by publication in
the Manila Times, a newspaper of general circulation as attested by the
Advertising Manager of the Metro Media Times, Inc., the publisher of the
said newspaper. Defendant, however, failed to file his answer to the
complaint despite the lapse of the period of sixty (60) days from the last
publication; hence, upon motion of the plaintiffs, through counsel,
defendant was declared in default and plaintiffs were authorized to
present their evidence ex parte.
In support of the complaint, plaintiffs presented as witnesses the minor
Karen E. Salvacion, her father, Federico N. Salvacion, Jr., a certain Joseph
Aguilar and a certain Liberato Madulio, who gave the following testimony:
BANKING | Nature of Funds Deposited | 141
Karen took her first year high school in St. Mary's Academy in Pasay City
but has recently transferred to Arellano University for her second year.
In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati
Cinema Square, with her friend Edna Tangile whiling away her free time.
At about 3:30 p.m. while she was finishing her snack on a concrete bench
in front of Plaza Fair, an American approached her. She was then alone
because Edna Tangile had already left, and she was about to go home.
(TSN, Aug. 15, 1989, pp. 2 to 5)
The American asked her name and introduced himself as Greg Bartelli.
He sat beside her when he talked to her. He said he was a Math teacher
and told her that he has a sister who is a nurse in New York. His sister
allegedly has a daughter who is about Karen's age and who was with him
in his house along Kalayaan Avenue. (TSN, Aug. 15, 1989, pp. 4-5)
The American asked Karen what was her favorite subject and she told him
it's Pilipino. He then invited her to go with him to his house where she
could teach Pilipino to his niece. He even gave her a stuffed toy to
persuade her to teach his niece. (Id., pp. 5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to reach
the defendant's house along Kalayaan Avenue. (Id., p. 6)
When they reached the apartment house, Karen noticed that defendant's
alleged niece was not outside the house but defendant told her maybe his
niece was inside. When Karen did not see the alleged niece inside the
house, defendant told her maybe his niece was upstairs, and invited
Karen to go upstairs. (Id., p. 7)
Upon entering the bedroom defendant suddenly locked the door. Karen
became nervous because his niece was not there. Defendant got a piece
of cotton cord and tied Karen's hands with it, and then he undressed her.
Karen cried for help but defendant strangled her. He took a packing tape
and he covered her mouth with it and he circled it around her head. (Id.,
p. 7)

Then, defendant suddenly pushed Karen towards the bed which was just
near the door. He tied her feet and hands spread apart to the bed posts.
He knelt in front of her and inserted his finger in her sex organ. She felt
severe pain. She tried to shout but no sound could come out because
there were tapes on her mouth. When defendant withdrew his finger it
was full of blood and Karen felt more pain after the withdrawal of the
finger. (Id., p. 8)
He then got a Johnson's Baby Oil and he applied it to his sex organ as
well as to her sex organ. After that he forced his sex organ into her but
he was not able to do so. While he was doing it, Karen found it difficult to
breathe and she perspired a lot while feeling severe pain. She merely
presumed that he was able to insert his sex organ a little, because she
could not see. Karen could not recall how long the defendant was in that
position. (Id. pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also told
Karen to take a shower and he untied her hands. Karen could only hear
the sound of the water while the defendant, she presumed, was in the
bathroom washing his sex organ. When she took a shower more blood
came out from her. In the meantime, defendant changed the mattress
because it was full of blood. After the shower, Karen was allowed by
defendant to sleep. She fell asleep because she got tired crying. The
incident happened at about 4:00 p.m. Karen had no way of determining
the exact time because defendant removed her watch. Defendant did not
care to give her food before she went to sleep. Karen woke up at about
8:00 o'clock the following morning. (Id., pp. 9-10)
The following day, February 5, 1989, a Sunday, after a breakfast of biscuit
and coke at about 8:30 to 9:00 a.m. defendant raped Karen while she
was still bleeding. For lunch, they also took biscuit and coke. She was
raped for the second time at about 12:00 to 2:00 p.m. In the evening,
they had rice for dinner which defendant had stored downstairs; it was
he who cooked the rice that is why it looks like "lugaw". For the third
time, Karen was raped again during the night. During those three times
BANKING | Nature of Funds Deposited | 142
defendant succeeded in inserting his sex organ but she could not say
whether the organ was inserted wholly.
Karen did not see any firearm or any bladed weapon. The defendant did
not tie her hands and feet nor put a tape on her mouth anymore but she
did not cry for help for fear that she might be killed; besides, all the
windows and doors were closed. And even if she shouted for help, nobody
would hear her. She was so afraid that if somebody would hear her and
would be able to call the police, it was still possible that as she was still
inside the house, defendant might kill her. Besides, the defendant did not
leave that Sunday, ruling out her chance to call for help. At nighttime he
slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times, once in the
morning for thirty minutes after a breakfast of biscuits; again in the
afternoon; and again in the evening. At first, Karen did not know that
there was a window because everything was covered by a carpet, until
defendant opened the window for around fifteen minutes or less to let
some air in, and she found that the window was covered by styrofoam
and plywood. After that, he again closed the window with a hammer and
he put the styrofoam, plywood, and carpet back. (Id., pp. 14-15)
That Monday evening, Karen had a chance to call for help, although
defendant left but kept the door closed. She went to the bathroom and
saw a small window covered by styrofoam and she also spotted a small
hole. She stepped on the bowl and she cried for help through the hole.
She cried: "Maawa no po kayo so akin. Tulungan n'yo akong makalabas
dito. Kinidnap ako!" Somebody heard her. It was a woman, probably a
neighbor, but she got angry and said she was "istorbo". Karen pleaded
for help and the woman told her to sleep and she will call the police. She
finally fell asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-
16)
She woke up at 6:00 o'clock the following morning, and she saw
defendant in bed, this time sleeping. She waited for him to wake up. When
he woke up, he again got some food but he always kept the door locked.

As usual, she was merely fed with biscuit and coke. On that day, February
7, 1989, she was again raped three times. The first at about 6:30 to 7:00
a.m., the second at about 8:30 — 9:00, and the third was after lunch at
12:00 noon. After he had raped her for the second time he left but only
for a short while. Upon his return, he caught her shouting for help but he
did not understand what she was shouting about. After she was raped the
third time, he left the house. (TSN, Aug. 15, 1989, pp. 16-17) She again
went to the bathroom and shouted for help. After shouting for about five
minutes, she heard many voices. The voices were asking for her name
and she gave her name as Karen Salvacion. After a while, she heard a
voice of a woman saying they will just call the police. They were also
telling her to change her clothes. She went from the bathroom to the
room but she did not change her clothes being afraid that should the
neighbors call for the police and the defendant see her in different clothes,
he might kill her. At that time she was wearing a T-shirt of the American
because the latter washed her dress. (Id., p. 16)
Afterwards, defendant arrived and he opened the door. He asked her if
she had asked for help because there were many policemen outside and
she denied it. He told her to change her clothes, and she did change to
the one she was wearing on Saturday. He instructed her to tell the police
that she left home and willingly; then he went downstairs but he locked
the door. She could hear people conversing but she could not understand
what they were saying. (Id., p. 19)
When she heard the voices of many people who were conversing
downstairs, she knocked repeatedly at the door as hard as she could. She
heard somebody going upstairs and when the door was opened, she saw
a policeman. The policeman asked her name and the reason why she was
there. She told him she was kidnapped. Downstairs, he saw about five
policemen in uniform and the defendant was talking to them. "Nakikipag-
areglo po sa mga pulis," Karen added. "The policeman told him to just
explain at the precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in front
of the house. They rode the car of a certain person she called Kuya Boy
BANKING | Nature of Funds Deposited | 143
together with defendant, the policeman, and two of her neighbors whom
she called Kuya Bong Lacson and one Ate Nita. They were brought to Sub-
Station I and there she was investigated by a policeman. At about 2:00
a.m., her father arrived, followed by her mother together with some of
their neighbors. Then they were brought to the second floor of the police
headquarters. (Id., p. 21)
At the headquarters, she was asked several questions by the investigator.
The written statement she gave to the police was marked as Exhibit A.
Then they proceeded to the National Bureau of Investigation together
with the investigator and her parents. At the NBI, a doctor, a medico-
legal officer, examined her private parts. It was already 3:00 in the early
morning of the following day when they reached the NBI. (TSN, Aug. 15,
1989, p. 22) The findings of the medico-legal officer has been marked as
Exhibit B.
She was studying at the St. Mary's Academy in Pasay City at the time of
the incident but she subsequently transferred to Apolinario Mabini,
Arellano University, situated along Taft Avenue, because she was
ashamed to be the subject of conversation in the school. She first applied
for transfer to Jose Abad Santos, Arellano University along Taft Avenue
near the Light Rail Transit Station but she was denied admission after she
told the school the true reason for her transfer. The reason for their denial
was that they might be implicated in the case. (TSN, Aug. 15, 1989, p.
46)
xxx xxx xxx
After the incident, Karen has changed a lot. She does not play with her
brother and sister anymore, and she is always in a state of shock; she
has been absent-minded and is ashamed even to go out of the house.
(TSN, Sept. 12, 1989, p. 10) She appears to be restless or sad, (Id., p.
11) The father prays for P500,000.00 moral damages for Karen for this
shocking experience which probably, she would always recall until she
reaches old age, and he is not sure if she could ever recover from this
experience. (TSN, Sept. 24, 1989, pp. 10-11)

Pursuant to an Order granting leave to publish notice of decision, said
notice was published in the Manila Bulletin once a week for three
consecutive weeks. After the lapse of fifteen (15) days from the date of
the last publication of the notice of judgment and the decision of the trial
court had become final, petitioners tried to execute on Bartelli's dollar
deposit with China Banking Corporation. Likewise, the bank invoked
Section 113 of Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down
to two:
May this Court entertain the instant petition despite the fact that original
jurisdiction in petitions for declaratory relief rests with the lower court?
Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A.
6426, as amended by P.D. 1246, otherwise known as the Foreign
Currency Deposit Act be made applicable to a foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank
Circular No. 960 providing that "Foreign currency deposits shall be
exempt from attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any administrative
body whatsoever." should be adjudged as unconstitutional on the grounds
that: 1.) it has taken away the right of petitioners to have the bank
deposit of defendant Greg Bartelli y Northcott garnished to satisfy the
judgment rendered in petitioners' favor in violation of substantive due
process guaranteed by the Constitution; 2.) it has given foreign currency
depositors an undue favor or a class privilege in violation of the equal
protection clause of the Constitution; 3.) it has provided a safe haven for
criminals like the herein respondent Greg Bartelli y Northcott since
criminals could escape civil liability for their wrongful acts by merely
converting their money to a foreign currency and depositing it in a foreign
currency deposit account with an authorized bank; and 4.) The Monetary
Board, in issuing Section 113 of Central Bank Circular No. 960 has
exceeded its delegated quasi-legislative power when it took away: a.) the
BANKING | Nature of Funds Deposited | 144
plaintiffs substantive right to have the claim sought to be enforced by the
civil action secured by way of the writ of preliminary attachment as
granted by Rule 57 of the Revised Rules of Court; b.) the plaintiffs
substantive right to have the judgment credit satisfied by way of the writ
of execution out of the bank deposit of the judgment debtor as granted
to the judgment creditor by Rule 39 of the Revised Rules of Court, which
is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that
the Monetary Board in issuing Section 113 of CB Circular No. 960 did not
exceed its power or authority because the subject Section is copied
verbatim from a portion of R.A. No. 6426 as amended by P.D. 1246.
Hence, it was not the Monetary Board that grants exemption from
attachment or garnishment to foreign currency deposits, but the law (R.A.
6426 as amended) itself; that it does not violate the substantive due
process guaranteed by the Constitution because a.) it was based on a
law; b.) the law seems to be reasonable; c.) it is enforced according to
regular methods of procedure; and d.) it applies to all members of a class.
Expanding, the Central Bank said; that one reason for exempting the
foreign currency deposits from attachment, garnishment or any other
order or process of any court, is to assure the development and speedy
growth of the Foreign Currency Deposit System and the Offshore Banking
System in the Philippines; that another reason is to encourage the inflow
of foreign currency deposits into the banking institutions thereby placing
such institutions more in a position to properly channel the same to loans
and investments in the Philippines, thus directly contributing to the
economic development of the country; that the subject section is being
enforced according to the regular methods of procedure; and that it
applies to all foreign currency deposits made by any person and therefore
does not violate the equal protection clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is
needed to promote the public interest and the general welfare; that the
State cannot just stand idly by while a considerable segment of the
society suffers from economic distress; that the State had to take some

measures to encourage economic development; and that in so doing
persons and property may be subjected to some kinds of restraints or
burdens to secure the general welfare or public interest. Respondent
Central Bank also alleges that Rule 39 and Rule 57 of the Revised Rules
of Court provide that some properties are exempted from
execution/attachment especially provided by law and R.A. No. 6426 as
amended is such a law, in that it specifically provides, among others, that
foreign currency deposits shall be exempted from attachment,
garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
For its part, respondent China Banking Corporation, aside from giving
reasons similar to that of respondent Central Bank, also stated that
respondent China Bank is not unmindful of the inhuman sufferings
experienced by the minor Karen E. Salvacion from the beastly hands of
Greg Bartelli; that it is only too willing to release the dollar deposit of
Bartelli which may perhaps partly mitigate the sufferings petitioner has
undergone; but it is restrained from doing so in view of R.A. No. 6426
and Section 113 of Central Bank Circular No. 960; and that despite the
harsh effect of these laws on petitioners, CBC has no other alternative but
to follow the same.
This Court finds the petition to be partly meritorious.
Petitioner deserves to receive the damages awarded to her by the court.
But this petition for declaratory relief can only be entertained and treated
as a petition for mandamus to require respondents to honor and comply
with the writ of execution in Civil Case No. 89-3214.
This Court has no original and exclusive jurisdiction over a petition for
declaratory relief.2 However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one
for mandamus.3
Here is a child, a 12-year old girl, who in her belief that all Americans are
good and in her gesture of kindness by teaching his alleged niece the
BANKING | Nature of Funds Deposited | 145
Filipino language as requested by the American, trustingly went with said
stranger to his apartment, and there she was raped by said American
tourist Greg Bartelli. Not once, but ten times. She was detained therein
for four (4) days. This American tourist was able to escape from the jail
and avoid punishment. On the other hand, the child, having received a
favorable judgment in the Civil Case for damages in the amount of more
than P1,000,000.00, which amount could alleviate the humiliation,
anxiety, and besmirched reputation she had suffered and may continue
to suffer for a long, long time; and knowing that this person who had
wronged her has the money, could not, however get the award of
damages because of this unreasonable law. This questioned law,
therefore makes futile the favorable judgment and award of damages that
she and her parents fully deserve. As stated by the trial court in its
decision,
Indeed, after hearing the testimony of Karen, the Court believes that it
was undoubtedly a shocking and traumatic experience she had undergone
which could haunt her mind for a long, long time, the mere recall of which
could make her feel so humiliated, as in fact she had been actually
humiliated once when she was refused admission at the Abad Santos High
School, Arellano University, where she sought to transfer from another
school, simply because the school authorities of the said High School
learned about what happened to her and allegedly feared that they might
be implicated in the case.
xxx xxx xxx
The reason for imposing exemplary or corrective damages is due to the
wanton and bestial manner defendant had committed the acts of rape
during a period of serious illegal detention of his hapless victim, the minor
Karen Salvacion whose only fault was in her being so naive and credulous
to believe easily that defendant, an American national, could not have
such a bestial desire on her nor capable of committing such a heinous
crime. Being only 12 years old when that unfortunate incident happened,
she has never heard of an old Filipino adage that in every forest there is
a snake, . . . .4
 BANKING | Nature of Funds Deposited | 146

If Karen's sad fate had happened to anybody's own kin, it would be when the deposit does not come from a lender or investor but from a
difficult for him to fathom how the incentive for foreign currency deposit mere transient or tourist who is not expected to maintain the deposit in
could be more important than his child's rights to said award of damages; the bank for long.
in this case, the victim's claim for damages from this alien who had the
gall to wrong a child of tender years of a country where he is a mere The resolution of this question is important for the protection of nationals
visitor. This further illustrates the flaw in the questioned provisions. who are victimized in the forum by foreigners who are merely passing
through.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a
time when the country's economy was in a shambles; when foreign xxx xxx xxx
investments were minimal and presumably, this was the reason why said
. . . Respondents China Banking Corporation and Central Bank of the
statute was enacted. But the realities of the present times show that the
Philippines refused to honor the writ of execution issued in Civil Case No.
country has recovered economically; and even if not, the questioned law
89-3214 on the strength of the following provision of Central Bank
still denies those entitled to due process of law for being unreasonable
Circular No. 960:
and oppressive. The intention of the questioned law may be good when
enacted. The law failed to anticipate the iniquitous effects producing
Sec. 113. Exemption from attachment. — Foreign currency deposits shall
outright injustice and inequality such as the case before us.
be exempt from attachment, garnishment, or any other order or process
of any court, legislative body, government agency or any administrative
It has thus been said that —
body whatsoever.
But I also know,5 that laws and institutions must go hand in hand with
Central Bank Circular No. 960 was issued pursuant to Section 7 of
the progress of the human mind. As that becomes more developed, more
Republic Act No. 6426:
enlightened, as new discoveries are made, new truths are disclosed and
manners and opinions change with the change of circumstances,
Sec. 7. Rules and Regulations. The Monetary Board of the Central Bank
institutions must advance also, and keep pace with the times. . . We might
shall promulgate such rules and regulations as may be necessary to carry
as well require a man to wear still the coat which fitted him when a boy,
out the provisions of this Act which shall take effect after the publication
as civilized society to remain ever under the regimen of their barbarous
of such rules and regulations in the Official Gazette and in a newspaper
ancestors.
of national circulation for at least once a week for three consecutive
weeks. In case the Central Bank promulgates new rules and regulations
In his Comment, the Solicitor General correctly opined, thus:
decreasing the rights of depositors, the rules and regulations at the time
The present petition has far-reaching implications on the right of a the deposit was made shall govern.
national to obtain redress for a wrong committed by an alien who takes
The aforecited Section 113 was copied from Section 8 of Republic Act NO.
refuge under a law and regulation promulgated for a purpose which does
6426, as amended by P.D. 1246, thus:
not contemplate the application thereof envisaged by the alien. More
specifically, the petition raises the question whether the protection
Sec. 8. Secrecy of Foreign Currency Deposits. — All foreign currency
against attachment, garnishment or other court process accorded to
deposits authorized under this Act, as amended by Presidential Decree
foreign currency deposits by PD No. 1246 and CB Circular No. 960 applies
 BANKING | Nature of Funds Deposited | 147

No. 1035, as well as foreign currency deposits authorized under in the Philippines, thus directly contributing to the economic development
Presidential Decree No. 1034, are hereby declared as and considered of of the country;
an absolutely confidential nature and, except upon the written permission
of the depositor, in no instance shall such foreign currency deposits be Thus, one of the principal purposes of the protection accorded to foreign
examined, inquired or looked into by any person, government official, currency deposits is "to assure the development and speedy growth of
bureau or office whether judicial or administrative or legislative or any the Foreign Currency Deposit system and the Offshore Banking in the
other entity whether public or private: Provided, however, that said Philippines" (3rd Whereas).
foreign currency deposits shall be exempt from attachment, garnishment,
The Offshore Banking System was established by PD No. 1034. In turn,
or any other order or process of any court, legislative body, government
the purposes of PD No. 1034 are as follows:
agency or any administrative body whatsoever.
WHEREAS, conditions conducive to the establishment of an offshore
The purpose of PD 1246 in according protection against attachment,
banking system, such as political stability, a growing economy and
garnishment and other court process to foreign currency deposits is
adequate communication facilities, among others, exist in the Philippines;
stated in its whereases, viz.:
WHEREAS, it is in the interest of developing countries to have as wide
WHEREAS, under Republic Act No. 6426, as amended by Presidential
access as possible to the sources of capital funds for economic
Decree No. 1035, certain Philippine banking institutions and branches of
development;
foreign banks are authorized to accept deposits in foreign currency;
WHEREAS, an offshore banking system based in the Philippines will be
WHEREAS, under the provisions of Presidential Decree No. 1034
advantageous and beneficial to the country by increasing our links with
authorizing the establishment of an offshore banking system in the
foreign lenders, facilitating the flow of desired investments into the
Philippines, offshore banking units are also authorized to receive foreign
Philippines, creating employment opportunities and expertise in
currency deposits in certain cases;
international finance, and contributing to the national development effort.
WHEREAS, in order to assure the development and speedy growth of the
WHEREAS, the geographical location, physical and human resources, and
Foreign Currency Deposit System and the Offshore Banking System in the
other positive factors provide the Philippines with the clear potential to
Philippines, certain incentives were provided for under the two Systems
develop as another financial center in Asia;
such as confidentiality of deposits subject to certain exceptions and tax
exemptions on the interest income of depositors who are nonresidents
On the other hand, the Foreign Currency Deposit system was created by
and are not engaged in trade or business in the Philippines;
PD. No. 1035. Its purposes are as follows:
WHEREAS, making absolute the protective cloak of confidentiality over
WHEREAS, the establishment of an offshore banking system in the
such foreign currency deposits, exempting such deposits from tax, and
Philippines has been authorized under a separate decree;
guaranteeing the vested rights of depositors would better encourage the
inflow of foreign currency deposits into the banking institutions authorized WHEREAS, a number of local commercial banks, as depository bank under
to accept such deposits in the Philippines thereby placing such institutions the Foreign Currency Deposit Act (RA No. 6426), have the resources and
more in a position to properly channel the same to loans and investments

managerial competence to more actively engage in foreign exchange
transactions and participate in the grant of foreign currency loans to
resident corporations and firms;
WHEREAS, it is timely to expand the foreign currency lending authority of
the said depository banks under RA 6426 and apply to their transactions
the same taxes as would be applicable to transaction of the proposed
offshore banking units;
It is evident from the above [Whereas clauses] that the Offshore Banking
System and the Foreign Currency Deposit System were designed to draw
deposits from foreign lenders and investors (Vide second Whereas of PD
No. 1034; third Whereas of PD No. 1035). It is these deposits that are
induced by the two laws and given protection and incentives by them.
Obviously, the foreign currency deposit made by a transient or a tourist
is not the kind of deposit encouraged by PD Nos. 1034 and 1035 and
given incentives and protection by said laws because such depositor stays
only for a few days in the country and, therefore, will maintain his deposit
in the bank only for a short time.
Respondent Greg Bartelli, as stated, is just a tourist or a transient. He
deposited his dollars with respondent China Banking Corporation only for
safekeeping during his temporary stay in the Philippines.
For the reasons stated above, the Solicitor General thus submits that the
dollar deposit of respondent Greg Bartelli is not entitled to the protection
of Section 113 of Central Bank Circular No. 960 and PD No. 1246 against
attachment, garnishment or other court processes.6
In fine, the application of the law depends on the extent of its justice.
Eventually, if we rule that the questioned Section 113 of Central Bank
Circular No. 960 which exempts from attachment, garnishment, or any
other order or process of any court, legislative body, government agency
or any administrative body whatsoever, is applicable to a foreign
transient, injustice would result especially to a citizen aggrieved by a
foreign guest like accused Greg Bartelli. This would negate Article 10 of
BANKING | Nature of Funds Deposited | 148
the New Civil Code which provides that "in case of doubt in the
interpretation or application of laws, it is presumed that the lawmaking
body intended right and justice to prevail. "Ninguno non deue
enriquecerse tortizeramente con dano de otro." Simply stated, when the
statute is silent or ambiguous, this is one of those fundamental solutions
that would respond to the vehement urge of conscience. (Padilla vs.
Padilla, 74 Phil. 377).
It would be unthinkable, that the questioned Section 113 of Central Bank
No. 960 would be used as a device by accused Greg Bartelli for
wrongdoing, and in so doing, acquitting the guilty at the expense of the
innocent.
Call it what it may — but is there no conflict of legal policy here? Dollar
against Peso? Upholding the final and executory judgment of the lower
court against the Central Bank Circular protecting the foreign depositor?
Shielding or protecting the dollar deposit of a transient alien depositor
against injustice to a national and victim of a crime? This situation calls
for fairness against legal tyranny.
We definitely cannot have both ways and rest in the belief that we have
served the ends of justice.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960
and PD No. 1246, insofar as it amends Section 8 of R.A. No. 6426 are
hereby held to be INAPPLICABLE to this case because of its peculiar
circumstances. Respondents are hereby REQUIRED to COMPLY with the
writ of execution issued in Civil Case No. 89-3214, "Karen Salvacion, et
al. vs. Greg Bartelli y Northcott, by Branch CXLIV, RTC Makati and to
RELEASE to petitioners the dollar deposit of respondent Greg Bartelli y
Northcott in such amount as would satisfy the judgment.
SO ORDERED.

GARNISHMENT
G.R. No. L-30671 November 28, 1973
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
HON. GUILLERMO P. VILLASOR, as Judge of the Court of First Instance
of Cebu, Branch I, THE PROVINCIAL SHERIFF OF RIZAL, THE SHERIFF
OF QUEZON CITY, and THE SHERIFF OF THE CITY OF MANILA, THE
CLERK OF COURT, Court of First Instance of Cebu, P. J. KIENER CO.,
LTD., GAVINO UNCHUAN, AND INTERNATIONAL CONSTRUCTION
CORPORATION, respondents.
FERNANDO, J.:
The Republic of the Philippines in this certiorari and prohibition
proceeding challenges the validity of an order issued by respondent Judge
Guillermo P. Villasor, then of the Court of First Instance of Cebu, Branch
I,1 declaring a decision final and executory and of an alias writ of
execution directed against the funds of the Armed Forces of the
Philippines subsequently issued in pursuance thereof, the alleged ground
being excess of jurisdiction, or at the very least, grave abuse of discretion.
As thus simply and tersely put, with the facts being undisputed and the
principle of law that calls for application indisputable, the outcome is
predictable. The Republic of the Philippines is entitled to the writs prayed
for. Respondent Judge ought not to have acted thus. The order thus
impugned and the alias writ of execution must be nullified.
In the petition filed by the Republic of the Philippines on July 7, 1969, a
summary of facts was set forth thus: "7. On July 3, 1961, a decision was
rendered in Special Proceedings No. 2156-R in favor of respondents P. J.
Kiener Co., Ltd., Gavino Unchuan, and International Construction
Corporation, and against the petitioner herein, confirming the arbitration
award in the amount of P1,712,396.40, subject of Special Proceedings. 8.
On June 24, 1969, respondent Honorable Guillermo P. Villasor, issued an
Order declaring the aforestated decision of July 3, 1961 final and
executory, directing the Sheriffs of Rizal Province, Quezon City [as well
as] Manila to execute the said decision. 9. Pursuant to the said Order
BANKING | Nature of Funds Deposited | 149
dated June 24, 1969, the corresponding Alias Writ of Execution [was
issued] dated June 26, 1969, .... 10. On the strength of the afore-
mentioned Alias Writ of Execution dated June 26, 1969, the Provincial
Sheriff of Rizal (respondent herein) served notices of garnishment dated
June 28, 1969 with several Banks, specially on the "monies due the Armed
Forces of the Philippines in the form of deposits sufficient to cover the
amount mentioned in the said Writ of Execution"; the Philippine Veterans
Bank received the same notice of garnishment on June 30, 1969 .... 11.
The funds of the Armed Forces of the Philippines on deposit with the
Banks, particularly, with the Philippine Veterans Bank and the Philippine
National Bank [or] their branches are public funds duly appropriated and
allocated for the payment of pensions of retirees, pay and allowances of
military and civilian personnel and for maintenance and operations of the
Armed Forces of the Philippines, as per Certification dated July 3, 1969
by the AFP Controller,..."2. The paragraph immediately succeeding in such
petition then alleged: "12. Respondent Judge, Honorable Guillermo P.
Villasor, acted in excess of jurisdiction [or] with grave abuse of discretion
amounting to lack of jurisdiction in granting the issuance of an alias writ
of execution against the properties of the Armed Forces of the Philippines,
hence, the Alias Writ of Execution and notices of garnishment issued
pursuant thereto are null and void."3 In the answer filed by respondents,
through counsel Andres T. Velarde and Marcelo B. Fernan, the facts set
forth were admitted with the only qualification being that the total award
was in the amount of P2,372,331.40.4
The Republic of the Philippines, as mentioned at the outset, did right in
filing this certiorari and prohibition proceeding. What was done by
respondent Judge is not in conformity with the dictates of the
Constitution. .
It is a fundamental postulate of constitutionalism flowing from the juristic
concept of sovereignty that the state as well as its government is immune
from suit unless it gives its consent. It is readily understandable why it
must be so. In the classic formulation of Holmes: "A sovereign is exempt
from suit, not because of any formal conception or obsolete theory, but
on the logical and practical ground that there can be no legal right as
 BANKING | Nature of Funds Deposited | 150

against the authority that makes the law on which the right doubt on that score. Thus: "A rule which has never been seriously
depends."5 Sociological jurisprudence supplies an answer not dissimilar. questioned, is that money in the hands of public officers, although it may
So it was indicated in a recent decision, Providence Washington Insurance be due government employees, is not liable to the creditors of these
Co. v. Republic of the Philippines,6 with its affirmation that "a continued employees in the process of garnishment. One reason is, that the State,
adherence to the doctrine of non-suability is not to be deplored for as by virtue of its sovereignty, may not be sued in its own courts except by
against the inconvenience that may be caused private parties, the loss of express authorization by the Legislature, and to subject its officers to
governmental efficiency and the obstacle to the performance of its garnishment would be to permit indirectly what is prohibited directly.
multifarious functions are far greater if such a fundamental principle were Another reason is that moneys sought to be garnished, as long as they
abandoned and the availability of judicial remedy were not thus restricted. remain in the hands of the disbursing officer of the Government, belong
With the well known propensity on the part of our people to go to court, to the latter, although the defendant in garnishment may be entitled to a
at the least provocation, the loss of time and energy required to defend specific portion thereof. And still another reason which covers both of the
against law suits, in the absence of such a basic principle that constitutes foregoing is that every consideration of public policy forbids it." 12
such an effective obstacle, could very well be imagined."7
In the light of the above, it is made abundantly clear why the Republic of
This fundamental postulate underlying the 1935 Constitution is now made the Philippines could rightfully allege a legitimate grievance.
explicit in the revised charter. It is therein expressly provided: "The State
may not be sued without its consent."8 A corollary, both dictated by logic WHEREFORE, the writs of certiorari and prohibition are granted, nullifying
and sound sense from a basic concept is that public funds cannot be the and setting aside both the order of June 24, 1969 declaring executory the
object of a garnishment proceeding even if the consent to be sued had decision of July 3, 1961 as well as the alias writ of execution issued
been previously granted and the state liability adjudged. Thus in the thereunder. The preliminary injunction issued by this Court on July 12,
recent case of Commissioner of Public Highways v. San Diego,9 such a 1969 is hereby made permanent.
well-settled doctrine was restated in the opinion of Justice Teehankee:
"The universal rule that where the State gives its consent to be sued by
private parties either by general or special law, it may limit claimant's
action 'only up to the completion of proceedings anterior to the stage of
execution' and that the power of the Courts ends when the judgment is
rendered, since government funds and properties may not be seized
under writs of execution or garnishment to satisfy such judgments, is
based on obvious considerations of public policy. Disbursements of public
funds must be covered by the corresponding appropriation as required by
law. The functions and public services rendered by the State cannot be
allowed to be paralyzed or disrupted by the diversion of public funds from
their legitimate and specific objects, as appropriated by law." 10 Such a
principle applies even to an attempted garnishment of a salary that had
accrued in favor of an employee. Director of Commerce and Industry v.
Concepcion, 11 speaks to that effect. Justice Malcolm as ponente left no

GARNISHMENT
G.R. No. L-34548 November 29, 1988
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
THE HONORABLE PACIFICO P. DE CASTRO and PHILIPPINE VIRGINIA
TOBACCO ADMINISTRATION, respondents
CORTES, J.:
The crux of the instant controversy dwells on the liability of a bank for
releasing its depositor's funds upon orders of the court, pursuant to a writ
of garnishment. If in compliance with the court order, the bank delivered
the garnished amount to the sheriff, who in turn delivered it to the
judgment creditor, but subsequently, the order of the court directing
payment was set aside by the same judge, should the bank be held
solidarily liable with the judgment creditor to its depositor for
reimbursement of the garnished funds? The Court does not think so.
In Civil Case No. Q-12785 of the Court of First Instance of Rizal, Quezon
City Branch IX entitled "Badoc Planters, Inc. versus Philippine Virginia
Tobacco Administration, et al.," which was an action for recovery of
unpaid tobacco deliveries, an Order (Partial Judgment) was issued on
January 15, 1970 by the Hon. Lourdes P. San Diego, then Presiding Judge,
ordering the defendants therein to pay jointly and severally, the plaintiff
Badoc Planters, Inc. (hereinafter referred to as "BADOC") within 48 hours
the aggregate amount of P206,916.76, with legal interests thereon.
On January 26,1970, BADOC filed an Urgent Ex-Parte Motion for a Writ of
Execution of the said Partial Judgment which was granted on the same
day by the herein respondent judge who acted in place of the Hon. Judge
San Diego who had just been elevated as a Justice of the Court of Appeals.
Accordingly, the Branch Clerk of Court on the very same day, issued a
Writ of Execution addressed to Special Sheriff Faustino Rigor, who then
issued a Notice of Garnishment addressed to the General Manager and/or
Cashier of Rizal Commercial Banking Corporation (hereinafter referred to
as RCBC), the petitioner in this case, requesting a reply within five (5)
BANKING | Nature of Funds Deposited | 151
days to said garnishment as to any property which the Philippine Virginia
Tobacco Administration (hereinafter referred to as "PVTA") might have in
the possession or control of petitioner or of any debts owing by the
petitioner to said defendant. Upon receipt of such Notice, RCBC notified
PVTA thereof to enable the PVTA to take the necessary steps for the
protection of its own interest [Record on Appeal, p. 36]
Upon an Urgent Ex-Parte Motion dated January 27, 1970 filed by BADOC,
the respondent Judge issued an Order granting the Ex-Parte Motion and
directing the herein petitioner "to deliver in check the amount garnished
to Sheriff Faustino Rigor and Sheriff Rigor in turn is ordered to cash the
check and deliver the amount to the plaintiff's representative and/or
counsel on record." [Record on Appeal, p. 20; Rollo, p. 5.] In compliance
with said Order, petitioner delivered to Sheriff Rigor a certified check in
the sum of P 206,916.76.
Respondent PVTA filed a Motion for Reconsideration dated February
26,1970 which was granted in an Order dated April 6,1970, setting aside
the Orders of Execution and of Payment and the Writ of Execution and
ordering petitioner and BADOC "to restore, jointly and severally, the
account of PVTA with the said bank in the same condition and state it was
before the issuance of the aforesaid Orders by reimbursing the PVTA of
the amount of P 206, 916.76 with interests at the legal rate from January
27, 1970 until fully paid to the account of the PVTA This is without
prejudice to the right of plaintiff to move for the execution of the partial
judgment pending appeal in case the motion for reconsideration is denied
and appeal is taken from the said partial judgment." [Record on Appeal,
p. 58]
The Motion for Reconsideration of the said Order of April 6, 1970 filed by
herein petitioner was denied in the Order of respondent judge dated June
10, 1970 and on June 19, 1970, which was within the period for perfecting
an appeal, the herein petitioner filed a Notice of Appeal to the Court of
Appeals from the said Orders.
 BANKING | Nature of Funds Deposited | 152

This case was then certified by the Court of Appeals to this Honorable PVTA however claims that the manner in which the bank complied with
Court, involving as it does purely questions of law. the Sheriffs Notice of Garnishment indicated breach of trust and
dereliction of duty on the part of the bank as custodian of government
The petitioner raises two principal queries in the instant case: 1) Whether funds. It insistently urges that the premature delivery of the garnished
or not PVTA funds are public funds not subject to garnishment; and 2) amount by RCBC to the special sheriff even in the absence of a demand
Whether or not the respondent Judge correctly ordered the herein to deliver made by the latter, before the expiration of the five-day period
petitioner to reimburse the amount paid to the Special Sheriff by virtue given to reply to the Notice of Garnishment, without any reply having
of the execution issued pursuant to the Order/Partial Judgment dated been given thereto nor any prior authorization from its depositor, PVTA
January 15, 1970. and even if the court's order of January 27, 1970 did not require the bank
to immediately deliver the garnished amount constitutes such lack of
The record reveals that on February 2, 1970, private respondent PVTA
prudence as to make it answerable jointly and severally with the plaintiff
filed a Motion for Reconsideration of the Order/ Partial Judgment of
for the wrongful release of the money from the deposit of the PVTA. The
January 15, 1970. This was granted and the aforementioned Partial
respondent Judge in his controverted Order sustained such contention
Judgment was set aside. The case was set for hearings on November 4,
and blamed RCBC for the supposed "hasty release of the amount from
9 and 11, 1970 [Rollo, pp. 205-207.] However, in view of the failure of
the deposit of the PVTA without giving PVTA a chance to take proper steps
plaintiff BADOC to appear on the said dates, the lower court ordered the
by informing it of the action being taken against its deposit, thereby
dismissal of the case against PVTA for failure to prosecute [Rollo, p. 208.]
observing with prudence the five-day period given to it by the sheriff."
[Rollo, p. 81.]
It must be noted that the Order of respondent Judge dated April 6, 1970
directing the plaintiff to reimburse PVTA t e amount of P206,916.76 with
Such allegations must be rejected for lack of merit. In the first place, it
interests became final as to said plaintiff who failed to even file a motion
should be pointed out that RCBC did not deliver the amount on the
for reconsideration, much less to appeal from the said Order.
strength solely of a Notice of Garnishment; rather, the release of the
Consequently, the order to restore the account of PVTA with RCBC in the
funds was made pursuant to the aforesaid Order of January 27, 1970.
same condition and state it was before the issuance of the questioned
While the Notice of Garnishment dated January 26, 1970 contained no
orders must be upheld as to the plaintiff, BADOC.
demand of payment as it was a mere request for petitioner to withold any
funds of the PVTA then in its possession, the Order of January 27, 1970
However, the questioned Order of April 6, 1970 must be set aside insofar
categorically required the delivery in check of the amount garnished to
as it ordered the petitioner RCBC, jointly and severally with BADOC, to
the special sheriff, Faustino Rigor.
reimburse PVTA.
In the second place, the bank had already filed a reply to the Notice of
The petitioner merely obeyed a mandatory directive from the respondent
Garnishment stating that it had in its custody funds belonging to the
Judge dated January 27, 1970, ordering petitioner 94 "to deliver in check
PVTA, which, in fact was the basis of the plaintiff in filing a motion to
the amount garnished to Sheriff Faustino Rigor and Sheriff Rigor is in turn
secure delivery of the garnished amount to the sheriff. [See Rollo, p. 93.]
ordered to cash the check and deliver the amount to the plaintiffs
representative and/or counsel on record." [Record on Appeal, p. 20.]

Lastly, the bank, upon the receipt of the Notice of Garnishment, duly
informed PVTA thereof to enable the latter to take the necessary steps for
the protection of its own interest [Record on Appeal, p. 36]
It is important to stress, at this juncture, that there was nothing irregular
in the delivery of the funds of PVTA by check to the sheriff, whose custody
is equivalent to the custody of the court, he being a court officer. The
order of the court dated January 27, 1970 was composed of two parts,
requiring: 1) RCBC to deliver in check the amount garnished to the
designated sheriff and 2) the sheriff in turn to cash the check and deliver
the amount to the plaintiffs representative and/or counsel on record. It
must be noted that in delivering the garnished amount in check to the
sheriff, the RCBC did not thereby make any payment, for the law
mandates that delivery of a check does not produce the effect of payment
until it has been cashed. [Article 1249, Civil Code.]
Moreover, by virtue of the order of garnishment, the same was placed
in custodia legis and therefore, from that time on, RCBC was holding the
funds subject to the orders of the court a quo. That the sheriff, upon
delivery of the check to him by RCBC encashed it and turned over the
proceeds thereof to the plaintiff was no longer the concern of RCBC as
the responsibility over the garnished funds passed to the court. Thus, no
breach of trust or dereliction of duty can be attributed to RCBC in
delivering its depositor's funds pursuant to a court order which was
merely in the exercise of its power of control over such funds.
... The garnishment of property to satisfy a writ of execution operates as
an attachment and fastens upon the property a lien by which the property
is brought under the jurisdiction of the court issuing the writ. It is brought
into custodia legis, under the sole control of such court [De Leon v.
Salvador, G.R. Nos. L-30871 and L-31603, December 28,1970, 36 SCRA
567, 574.]
The respondent judge however, censured the petitioner for having
released the funds "simply on the strength of the Order of the court which.
far from ordering an immediate release of the amount involved, merely
BANKING | Nature of Funds Deposited | 153
serves as a standing authority to make the release at the proper time as
prescribed by the rules." [Rollo, p. 81.]
This argument deserves no serious consideration. As stated earlier, the
order directing the bank to deliver the amount to the sheriff was distinct
and separate from the order directing the sheriff to encash the said check.
The bank had no choice but to comply with the order demanding delivery
of the garnished amount in check. The very tenor of the order called for
immediate compliance therewith. On the other hand, the bank cannot be
held liable for the subsequent encashment of the check as this was upon
order of the court in the exercise of its power of control over the funds
placed in custodia legis by virtue of the garnishment.
In a recent decision [Engineering Construction Inc., v. National Power
Corporation, G.R. No. L-34589, June 29, 1988] penned by the now Chief
Justice Marcelo Fernan, this Court absolved a garnishee from any liability
for prompt compliance with its order for the delivery of the garnished
funds. The rationale behind such ruling deserves emphasis in the present
case:
But while partial restitution is warranted in favor of NPC, we find that the
Appellate Court erred in not absolving MERALCO, the garnishee, from its
obligations to NPC with respect to the payment of ECI of P 1,114,543.23,
thus in effect subjecting MERALCO to double liability. MERALCO should
not have been faulted for its prompt obedience to a writ of garnishment.
Unless there are compelling reasons such as: a defect on the face of the
writ or actual knowledge on the part of the garnishee of lack of
entitlement on the part of the garnisher, it is not incumbent upon the
garnishee to inquire or to judge for itself whether or not the order for the
advance execution of a judgment is valid.
Section 8, Rule 57 of the Rules of Court provides:
Effect of attachment of debts and credits.—All persons having in their
possession or under their control any credits or other similar personal
property belonging to the party against whom attachment is issued, or
owing any debts to the same, all the time of service upon them of a copy

of the order of attachment and notice as provided in the last preceding
section, shall be liable to the applicant for the amount of such credits,
debts or other property, until the attachment be discharged, or any
judgment recovered by him be satisfied, unless such property be
delivered or transferred, or such debts be paid, to the clerk, sheriff or
other proper officer of the court issuing the attachment.
Garnishment is considered as a specie of attachment for reaching credits
belonging to the judgment debtor and owing to him from a stranger to
the litigation. Under the above-cited rule, the garnishee [the third person]
is obliged to deliver the credits, etc. to the proper officer issuing the writ
and "the law exempts from liability the person having in his possession
or under his control any credits or other personal property belonging to
the defendant, ..., if such property be delivered or transferred, ..., to the
clerk, sheriff, or other officer of the court in which the action is pending.
[3 Moran, Comments on the Rules of Court 34 (1970 ed.)]
Applying the foregoing to the case at bar, MERALCO, as garnishee, after
having been judicially compelled to pay the amount of the judgment
represented by funds in its possession belonging to the judgment debtor
or NPC, should be released from all responsibilities over such amount
after delivery thereof to the sheriff. The reason for the rule is self-evident.
To expose garnishees to risks for obeying court orders and processes
would only undermine the administration of justice. [Emphasis supplied.]
The aforequoted ruling thus bolsters RCBC's stand that its immediate
compliance with the lower court's order should not have been met with
the harsh penalty of joint and several liability. Nor can its liability to
reimburse PVTA of the amount delivered in check be premised upon the
subsequent declaration of nullity of the order of delivery. As correctly
pointed out by the petitioner:
xxx xxx xxx
That the respondent Judge, after his Order was enforced, saw fit to recall
said Order and decree its nullity, should not prejudice one who dutifully
abided by it, the presumption being that judicial orders are valid and
BANKING | Nature of Funds Deposited | 154
issued in the regular performance of the duties of the Court" [Section
5(m) Rule 131, Revised Rules of Court]. This should operate with greater
force in relation to the herein petitioner which, not being a party in the
case, was just called upon to perform an act in accordance with a judicial
flat. A contrary view will invite disrespect for the majesty of the law and
induce reluctance in complying with judicial orders out of fear that said
orders might be subsequently invalidated and thereby expose one to
suffer some penalty or prejudice for obeying the same. And this is what
will happen were the controversial orders to be sustained. We need not
underscore the danger of this as a precedent.
xxx xxx xxx [ Brief for the Petitioner, Rollo, p. 212; Emphasis supplied.]
From the foregoing, it may be concluded that the charge of breach of trust
and/or dereliction of duty as well as lack of prudence in effecting the
immediate payment of the garnished amount is totally unfounded. Upon
receipt of the Notice of Garnishment, RCBC duly informed PVTA thereof
to enable the latter to take the necessary steps for its protection.
However, right on the very next day after its receipt of such notice, RCBC
was already served with the Order requiring delivery of the garnished
amount. Confronted as it was with a mandatory directive, disobedience
to which exposed it to a contempt order, it had no choice but to comply.
The respondent Judge nevertheless held that the liability of RCBC for the
reimbursement of the garnished amount is predicated on the ruling of the
Supreme Court in the case of Commissioner of Public Highways v. Hon.
San Diego [G.R. No. L-30098, February 18, 1970, 31 SCRA 616] which
he found practically on all fours with the case at bar.
The Court disagrees.
The said case which reiterated the rule in Republic v. Palacio [G.R. No. L-
20322, May 29, 1968, 23 SCRA 899] that government funds and
properties may not be seized under writs of execution or garnishment to
satisfy such judgment is definitely distinguishable from the case at bar.

In the Commissioner of Public Highways case [supra], the bank which
precipitately allowed the garnishment and delivery of the funds failed to
inform its depositor thereof, charged as it was with knowledge of the
nullity of the writ of execution and notice of garnishment against
government funds. In the aforementioned case, the funds involved
belonged to the Bureau of Public Highways, which being an arm of the
executive branch of the government, has no personality of its own
separate from the National Government. The funds involved
were government funds covered by the rule on exemption from
execution.
This brings us to the first issue raised by the petitioner: Are the PVTA
funds public funds exempt from garnishment? The Court holds that they
are not.
Republic Act No. 2265 created the PVTA as an ordinary corporation with
all the attributes of a corporate entity subject to the provisions of the
Corporation Law. Hence, it possesses the power "to sue and be sued" and
"to acquire and hold such assets and incur such liabilities resulting directly
from operations authorized by the provisions of this Act or as essential to
the proper conduct of such operations." [Section 3, Republic Act No.
2265.]
Among the specific powers vested in the PVTA are: 1) to buy Virginia
tobacco grown in the Philippines for resale to local bona fide tobacco
manufacturers and leaf tobacco dealers [Section 4(b), R.A. No. 2265]; 2)
to contracts of any kind as may be necessary or incidental to the
attainment of its purpose with any person, firm or corporation, with the
Government of the Philippines or with any foreign government, subject to
existing laws [Section 4(h), R.A. No. 22651; and 3) generally, to exercise
all the powers of a corporation under the Corporation Law, insofar as they
are not inconsistent with the provisions of this Act [Section 4(k), R.A. No.
2265.]
From the foregoing, it is clear that PVTA has been endowed with a
personality distinct and separate from the government which owns and
BANKING | Nature of Funds Deposited | 155
controls it. Accordingly, this Court has heretofore declared that the funds
of the PVTA can be garnished since "funds of public corporation which can
sue and be sued were not exempt from garnishment" [Philippine National
Bank v. Pabalan, G.R. No. L-33112, June 15, 1978, 83 SCRA 595, 598.]
In National Shipyards and Steel Corp. v. CIR [G.R. No. L-17874, August
31, 1964, 8 SCRA 781], this Court held that the allegation to the effect
that the funds of the NASSCO are public funds of the government and
that as such, the same may not be garnished, attached or levied upon is
untenable for, as a government-owned or controlled corporation, it has a
personality of its own, distinct and separate from that of the government.
This court has likewise ruled that other govemment-owned and controlled
corporations like National Coal Company, the National Waterworks and
Sewerage Authority (NAWASA), the National Coconut Corporation
(NACOCO) the National Rice and Corn Corporation (NARIC) and the Price
Stabilization Council (PRISCO) which possess attributes similar to those
of the PVTA are clothed with personalities of their own, separate and
distinct from that of the government [National Coal Company v. Collector
of Internal Revenue, 46 Phil. 583 (1924); Bacani and Matoto v. National
Coconut Corporation et al., 100 Phil. 471 (1956); Reotan v. National Rice
& Corn Corporation, G.R. No. L-16223, February 27, 1962, 4 SCRA 418.]
The rationale in vesting it with a separate personality is not difficult to
find. It is well-settled that when the government enters into commercial
business, it abandons its sovereign capacity and is to be treated like any
other corporation [Manila Hotel Employees' Association v. Manila Hotel
Co. and CIR, 73 Phil. 734 (1941).]
Accordingly, as emphatically expressed by this Court in a 1978 decision,
"garnishment was the appropriate remedy for the prevailing party which
could proceed against the funds of a corporate entity even if owned or
controlled by the government" inasmuch as "by engaging in a particular
business thru the instrumentality of a corporation, the government
divests itself pro hac vice of its sovereign character, so as to render the
corporation subject to the rules of law governing private corporations"
[Philippine National Bank v. CIR, G.R No. L-32667, January 31, 1978, 81
SCRA 314, 319.]

Furthermore, in the case of PVTA, the law has expressly allowed it funds
to answer for various obligations, including the one sought to be enforced
by plaintiff BADOC in this case (i.e. for unpaid deliveries of tobacco).
Republic Act No. 4155, which discounted the erstwhile support given by
the Central Bank to PVTA, established in lieu thereof a "Tobacco Fund" to
be collected from the proceeds of fifty per centum of the tariff or taxes of
imported leaf tobacco and also fifty per centum of the specific taxes on
locally manufactured Virginia type cigarettes.
Section 5 of Republic Act No. 4155 provides that this fund shall be
expended for the support or payment of:
1. Indebtedness of the Philippine Virginia Tobacco Administration and the
former Agricultural Credit and Cooperative Financing Administration to
FACOMAS and farmers and planters regarding Virginia tobacco
transactions in previous years;
2. Indebtedness of the Philippine Virginia Tobacco Administration and the
former Agricultural Credit and Cooperative Financing Administration to
the Central Bank in gradual amounts regarding Virginia tobacco
transactions in previous years;
3. Continuation of the Philippine Virginia Tobacco Administration support
and subsidy operations including the purchase of locally grown and
produced Virginia leaf tobacco, at the present support and subsidy prices,
its procurement, redrying, handling, warehousing and disposal thereof,
and the redrying plants trading within the purview of their contracts;
4. Operational, office and field expenses, and the establishment of the
Tobacco Research and Grading Institute. [Emphasis supplied.]
Inasmuch as the Tobacco Fund, a special fund, was by law, earmarked
specifically to answer obligations incurred by PVTA in connection with its
proprietary and commercial operations authorized under the law, it
follows that said funds may be proceeded against by ordinary judicial
processes such as execution and garnishment. If such funds cannot be
executed upon or garnished pursuant to a judgment sustaining the
BANKING | Nature of Funds Deposited | 156
liability of the PVTA to answer for its obligations, then the purpose of the
law in creating the PVTA would be defeated. For it was declared to be a
national policy, with respect to the local Virginia tobacco industry, to
encourage the production of local Virginia tobacco of the qualities needed
and in quantities marketable in both domestic and foreign markets, to
establish this industry on an efficient and economic basis, and to create
a climate conducive to local cigarette manufacture of the qualities desired
by the consuming public, blending imported and native Virginia leaf
tobacco to improve the quality of locally manufactured cigarettes [Section
1, Republic Act No. 4155.]
The Commissioner of Public Highways case is thus distinguishable from
the case at bar. In said case, the Philippine National Bank (PNB) as
custodian of funds belonging to the Bureau of Public Highways, an agency
of the government, was chargeable with knowledge of the exemption of
such government funds from execution and garnishment pursuant to the
elementary precept that public funds cannot be disbursed without the
appropriation required by law. On the other hand, the same cannot hold
true for RCBC as the funds entrusted to its custody, which belong to a
public corporation, are in the nature of private funds insofar as their
susceptibility to garnishment is concerned. Hence, RCBC cannot be
charged with lack of prudence for immediately complying with the order
to deliver the garnished amount. Since the funds in its custody are
precisely meant for the payment of lawfully-incurred obligations, RCBC
cannot rightfully resist a court order to enforce payment of such
obligations. That such court order subsequently turned out to have been
erroneously issued should not operate to the detriment of one who
complied with its clear order.
Finally, it is contended that RCBC was bound to inquire into the legality
and propriety of the Writ of Execution and Notice of Garnishment issued
against the funds of the PVTA deposited with said bank. But the bank was
in no position to question the legality of the garnishment since it was not
even a party to the case. As correctly pointed out by the petitioner, it had
neither the personality nor the interest to assail or controvert the orders
of respondent Judge. It had no choice but to obey the same inasmuch as
 BANKING | Nature of Funds Deposited | 157

it had no standing at all to impugn the validity of the partial judgment

rendered in favor of the plaintiff or of the processes issued in execution
of such judgment.

RCBC cannot therefore be compelled to make restitution solidarily with

the plaintiff BADOC. Plaintiff BADOC alone was responsible for the
issuance of the Writ of Execution and Order of Payment and so, the
plaintiff alone should bear the consequences of a subsequent annulment
of such court orders; hence, only the plaintiff can be ordered to restore
the account of the PVTA.

WHEREFORE, the petition is hereby granted and the petitioner is

ABSOLVED from any liability to respondent PVTA for reimbursement of
the funds garnished. The questioned Order of the respondent Judge
ordering the petitioner, jointly and severally with BADOC, to restore the
account of PVTA are modified accordingly.

SO ORDERED.

GARNISHMENT
G.R. No. L-34964 January 31, 1973
CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-
appellants,
vs.
HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First
Instance of Manila, Branch VIII, and VICENTE G. ACABAN, respondents-
appellees.
MAKALINTAL, J.:
The only issue in this petition for certiorari to review the orders dated March
4, 1972 and March 27, 1972, respectively, of the Court of First Instance of
Manila in its Civil Case No. 75138, is whether or not a banking institution may
validly refuse to comply with a court process garnishing the bank deposit of
a judgment debtor, by invoking the provisions of Republic Act No. 1405. *
On December 17, 1968 Vicente Acaban filed a complaint in the court a
quo against Bautista Logging Co., Inc., B & B Forest Development Corporation
and Marino Bautista for the collection of a sum of money. Upon motion of the
plaintiff the trial court declared the defendants in default for failure to answer
within the reglementary period, and authorized the Branch Clerk of Court
and/or Deputy Clerk to receive the plaintiff's evidence. On January 20, 1970
judgment by default was rendered against the defendants.
To satisfy the judgment, the plaintiff sought the garnishment of the bank
deposit of the defendant B & B Forest Development Corporation with the
China Banking Corporation. Accordingly, a notice of garnishment was issued
by the Deputy Sheriff of the trial court and served on said bank through its
cashier, Tan Kim Liong. In reply, the bank' cashier invited the attention of the
Deputy Sheriff to the provisions of Republic Act No. 1405 which, it was
alleged, prohibit the disclosure of any information relative to bank deposits.
Thereupon the plaintiff filed a motion to cite Tan Kim Liong for contempt of
court.
In an order dated March 4, 1972 the trial court denied the plaintiff's motion.
However, Tan Kim Liong was ordered "to inform the Court within five days
from receipt of this order whether or not there is a deposit in the China
Banking Corporation of defendant B & B Forest Development Corporation, and
if there is any deposit, to hold the same intact and not allow any withdrawal
BANKING | Nature of Funds Deposited | 158
until further order from this Court." Tan Kim Liong moved to reconsider but
was turned down by order of March 27, 1972. In the same order he was
directed "to comply with the order of this Court dated March 4, 1972 within
ten (10) days from the receipt of copy of this order, otherwise his arrest and
confinement will be ordered by the Court." Resisting the two orders, the China
Banking Corporation and Tan Kim Liong instituted the instant petition.
The pertinent provisions of Republic Act No. 1405 relied upon by the
petitioners reads:
Sec. 2. All deposits of whatever nature with banks or banking institutions in
the Philippines including investments in bonds issued by the Government of
the Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office,
except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty
of public officials, or in cases where the money deposited or invested is the
subject matter of the litigation.
Sec 3. It shall be unlawful for any official or employee of a banking institution
to disclose to any person other than those mentioned in Section two hereof
any information concerning said deposits.
Sec. 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty
thousand pesos or both, in the discretion of the court.
The petitioners argue that the disclosure of the information required by the
court does not fall within any of the four (4) exceptions enumerated in Section
2, and that if the questioned orders are complied with Tan Kim Liong may be
criminally liable under Section 5 and the bank exposed to a possible damage
suit by B & B Forest Development Corporation. Specifically referring to this
case, the position of the petitioners is that the bank deposit of judgment
debtor B & B Forest Development Corporation cannot be subject to
garnishment to satisfy a final judgment against it in view of the aforequoted
provisions of law.
We do not view the situation in that light. The lower court did not order an
examination of or inquiry into the deposit of B & B Forest Development

Corporation, as contemplated in the law. It merely required Tan Kim Liong to
inform the court whether or not the defendant B & B Forest Development
Corporation had a deposit in the China Banking Corporation only for purposes
of the garnishment issued by it, so that the bank would hold the same intact
and not allow any withdrawal until further order. It will be noted from the
discussion of the conference committee report on Senate Bill No. 351 and
House Bill No. 3977, which later became Republic Act 1405, that it was not
the intention of the lawmakers to place bank deposits beyond the reach of
execution to satisfy a final judgment. Thus:
Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of
the Committee on Ways and Means to clarify this further. Suppose an
individual has a tax case. He is being held liable by the Bureau of Internal
Revenue for, say, P1,000.00 worth of tax liability, and because of this the
deposit of this individual is attached by the Bureau of Internal Revenue.
Mr. RAMOS. The attachment will only apply after the court has pronounced
sentence declaring the liability of such person. But where the primary aim is
to determine whether he has a bank deposit in order to bring about a proper
assessment by the Bureau of Internal Revenue, such inquiry is not authorized
by this proposed law.
Mr. MARCOS. But under our rules of procedure and under the Civil Code, the
attachment or garnishment of money deposited is allowed. Let us assume,
for instance, that there is a preliminary attachment which is for garnishment
or for holding liable all moneys deposited belonging to a certain individual,
but such attachment or garnishment will bring out into the open the value of
such deposit. Is that prohibited by this amendment or by this law?
Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or
rather, the inquiry is made only for the purpose of satisfying a tax liability
already declared for the protection of the right in favor of the government;
but when the object is merely to inquire whether he has a deposit or not for
purposes of taxation, then this is fully covered by the law.
Mr. MARCOS. And it protects the depositor, does it not?
Mr. RAMOS. Yes, it protects the depositor.
BANKING | Nature of Funds Deposited | 159
Mr. MARCOS. The law prohibits a mere investigation into the existence and
the amount of the deposit.
Mr. RAMOS. Into the very nature of such deposit.
Mr. MARCOS. So I come to my original question. Therefore, preliminary
garnishment or attachment of the deposit is not allowed?
Mr. RAMOS. No, without judicial authorization.
Mr. MARCOS. I am glad that is clarified. So that the established rule of
procedure as well as the substantive law on the matter is amended?
Mr. RAMOS. Yes. That is the effect.
Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing
the liability of an individual for taxation purposes and this judgment is sought
to be executed ... in the execution of that judgment, does this bill, or this
proposed law, if approved, allow the investigation or scrutiny of the bank
deposit in order to execute the judgment?
Mr. RAMOS. To satisfy a judgment which has become executory.
Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000
and the deposit is half a million, will this bill allow scrutiny into the deposit in
order that the judgment may be executed?
Mr. RAMOS. Merely to determine the amount of such money to satisfy that
obligation to the Government, but not to determine whether a deposit has
been made in evasion of taxes.
xxx xxx xxx
Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the
recovery of a sum of money the plaintiff wishes to attach the properties of
the defendant to insure the satisfaction of the judgment. Once the judgment
is rendered, does the gentleman mean that the plaintiff cannot attach the
bank deposit of the defendant?
 BANKING | Nature of Funds Deposited | 160

Mr. RAMOS. That was the question raised by the gentleman from Pangasinan
to which I replied that outside the very purpose of this law it could be reached
by attachment.

Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?

Mr. RAMOS. That is so.

(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-
3840, July 27, 1955).

It is sufficiently clear from the foregoing discussion of the conference

committee report of the two houses of Congress that the prohibition against
examination of or inquiry into a bank deposit under Republic Act 1405 does
not preclude its being garnished to insure satisfaction of a judgment. Indeed
there is no real inquiry in such a case, and if the existence of the deposit is
disclosed the disclosure is purely incidental to the execution process. It is
hard to conceive that it was ever within the intention of Congress to enable
debtors to evade payment of their just debts, even if ordered by the Court,
through the expedient of converting their assets into cash and depositing the
same in a bank.

WHEREFORE, the orders of the lower court dated March 4 and 27, 1972,
respectively, are hereby affirmed, with costs against the petitioners-
appellants.