RECIT-READY

Declaration of Policy

1. Banks act as intermediaries between savers and borrowers. They collect deposits from individuals and
businesses and provide loans to those in need. This process facilitates the efficient allocation of
financial resources, promoting economic activities and growth. The state acknowledged the important
role of banks in the development of the national economy.

2. Because banks handle people's money and are crucial for the country's financial health, banks need
to be super trustworthy and do their job really well. They must have very high standards of honesty and
performance.

3. The declaration emphasizes the State's commitment to promoting and maintaining a stable and
efficient banking and financial system. This system is envisioned to be globally competitive, dynamic,
and responsive to the evolving demands of a developing economy. In essence, the Sate aims to create
a robust financial infrastructure that not only meets domestic needs but also stands up to
international standards, ensuring competitiveness and adaptability to economic changes.

A fiduciary relationship is a special type of relationship where one party (the fiduciary) is entrusted with
certain responsibilities or duties for the benefit of another party (the beneficiary or principal).

When we talk about the "fiduciary nature" of banks, it implies that banks are entrusted with handling and
managing other people's money and financial affairs with the highest level of integrity and performance. This
fiduciary duty means that banks are expected to prioritize the best interests of their clients and act in a
responsible and ethical manner when dealing with their finances.

Diligence Required of Banks

DOCTRINES BASED ON JURISPRUDENCE:

Banks, in their fiduciary capacity, are required to exercise a degree of diligence that is more than that of a good
father of a family. In other words, banks are duty bound to treat the deposit accounts of their depositors with
the highest degree of care.

Banking institutions are imbued with public interest and hence, are obliged to exercise the highest degree of
diligence.

The high standards are also necessary to ensure public confidence in the banking system, for the stability of
banks largely depends on the confidence of the people in the honesty and efficiency of banks.

However, in commercial transactions not involving a fiduciary relationship, the court determines that banks
are not required to exert the same high level of diligence.

“Good father of a family" The term draws on the traditional role of a father as a figure responsible for the well-
being and guidance of a family. In many cultures, a "good father" is seen as someone who provides, protects,
and makes wise decisions for the benefit of the family.
In the context of banking, requiring diligence more than that of a "good father of a family" means that banks are
held to an exceptionally high standard of care and responsibility. Here's how the connection can be made:

1) Responsibility for Others' Well-Being: Similar to a good father's responsibility for the well-being of the family,
banks have a fiduciary duty to safeguard the financial well-being of their customers, including depositors. This
involves prudent financial management and risk mitigation to ensure the safety of deposited funds.

2)Protection of Assets: A good father is expected to protect the family's assets. Likewise, banks are entrusted
with the protection of their clients' assets, and they must implement robust security measures to prevent fraud,
theft, or any form of financial loss.

3) Wise Decision-Making: Just as a good father is expected to make wise decisions for the family's benefit,
banks are required to make sound financial decisions in managing investments, loans, and other financial
services. Prudent decision-making is crucial to maintain the stability and trustworthiness of the banking
system.

The comparison between banks being required to exercise more than that of a "good father of a family"
underscores the heightened level of responsibility, care, and diligence expected from financial institutions.
Here's how the comparison highlights the rigorous standards placed on banks:

1)Extended Duty of Care: While a good father is expected to exercise a high degree of care for the well-being of
the family, banks, in their fiduciary role, are held to an even higher standard. This means they must go above
and beyond typical care practices to ensure the security and prosperity of their clients' financial interests.

2)Complex Financial Responsibilities: The metaphor emphasizes that banks deal with complex financial
matters that require meticulous attention. Managing deposits, investments, loans, and other financial services
involves a level of expertise and diligence surpassing the responsibilities of an individual managing a
household.

3)Public Interest and Trust: Banks operate with a fiduciary duty that extends to the public interest. The
comparison highlights that banks are not just serving individual customers but are crucial institutions for the
entire economy. Maintaining public trust in the financial system requires a level of care beyond what an
individual might provide for their family.
CASES

Reyes vs. Court of Appeals

FACTS:

• In this case, the Philippine Racing Club, Inc. (PRCI) intended to attend the 20th Asian Racing
Conference in Sydney, Australia, in September 1988.
• To cover the conference fees, Gregorio H. Reyes, the vice-president for finance, racing manager,
treasurer, and director of PRCI, sent Godofredo Reyes to the respondent bank in Makati City to obtain
a foreign exchange demand draft in Australian dollars.
• The bank initially hesitated due to the lack of an Australian dollar account in Sydney but proposed
roundabout method:

1) The respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia
(referred to as Westpac-Sydney).
2) Westpac-Sydney would then reimburse itself from the U.S. dollar account of the respondent
bank in Westpac Bank in New York, U.S.A. (referred to as Westpac-New York).
• The bank eventually approved the application, issuing FXDD No. 209968 on July 28, 1988, for
AU$1,610.00, payable to the 20th Asian Racing Conference Secretariat in Sydney, with Westpac-
Sydney as the drawee bank.
• However, on August 10, 1988, the foreign exchange demand draft was dishonored upon presentation,
citing "No account held with Westpac."
• The bank learned from Westpac-New York about the debit to the respondent bank's U.S. dollar
account. Despite efforts to resolve the issue, the draft was dishonored again on September 14, 1988,
for the same reason.
• As a result, Gregorio H. Reyes and Consuelo Puyat-Reyes, the petitioners, faced embarrassment and
humiliation at the conference registration desk in Sydney when they were informed that the demand
draft had been dishonored. Gregorio Reyes had to pay the registration fee in cash, witnessed by other
conference delegates.
• The petitioners filed a complaint for damages against the respondent bank in November 1988,
claiming exposure to shock, social humiliation, and mental anguish in a foreign country and in the
presence of an international audience.
• The trial court ruled in favor of the respondent bank.
• The Court of Appeals affirmed the decision, stating that the bank had made reasonable efforts, and
any miscommunication with Westpac-Sydney was not the bank's fault.
• The petitioners then filed this petition, seeking a review by the Supreme Court.

ISSUE:

Whether the respondent bank should have exercised a higher degree of diligence in handling its affairs due to
the fiduciary nature of the relationship between the bank and its clients.

RULING:

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals.

RATIONALE:

The court referenced a legal precedent (Philippine Bank of Commerce v. Court of Appeals) stating that:
Banks, in their fiduciary capacity, are required to exercise a degree of diligence that is more than that of a good
father of a family. In other words, banks are duty bound to treat the deposit accounts of their depositors with
the highest degree of care.

However, in commercial transactions not involving a fiduciary relationship, the court determine that banks are
not required to exert the same high level of diligence.

In this case, the relationship was a commercial transaction between the bank as the seller of the foreign
exchange demand draft, and PRCI as the buyer, thus it was not required to exert more than the diligence of a
good father of a family.

Comsavings Bank (now GSIS Family Bank) v. Spouses Danilo and Estrella Capistrano

FACTS:

• The Spouses Capistrano (respondents) owned a residential lot in Bacoor, Cavite.

• They availed the Unified Home Lending Program (UHLP) through the National Home Mortgage Finance
Corporation (NHMFC) to finance the construction of their house.
• They executed a construction contract with GCB Builders for ₱265,000.00, with completion expected
within 75 days.
• GCB facilitated their loan application with Comsavings Bank, an NHMFC-accredited originator.
• Respondents submitted necessary documents for loan approval.
• Comsavings Bank informed respondents that they needed to sign various documents for the loan
release, including a certificate of house completion and acceptance.
• It notified GCB Builders that respondents had complied with preliminary requirements for the loan,
subject to conditions like signing mortgage documents and 100% completion of construction, original
certificate of occupancy permit and certification of completion, and submission of house pictures
signed by the borrower at the back.
• Despite fulfilling preliminary requirements, and after several loan releases to GCB Builders, the
construction remained incomplete. GCB Builders cited reasons like the rainy season.
• Respondents demanded completion. However, GCB Builders asked for an additional ₱25,000.00 to
finish the construction.
• Respondents requested a breakdown of expenses, but instead, GCB Builders' counsel sent a demand
letter for an additional construction cost of ₱52,511.59.
• Respondents received a letter from NHMFC to start paying monthly amortizations despite the
incomplete house.
• Respondents found the house unfinished, with various issues like missing fixtures, cracks, and a
different door type.
• Respondents protested the demand for amortization payments, and NHMFC’s inspection confirmed
incomplete construction.
• Respondents sued GCB Builders, Comsavings Bank, and later NHMFC for breach of contract and
damages. They sought completion of the house, payment for damages, and requested NHMFC to hold
amortization collection.
• Regional Trial Court (RTC) ruled in favor of respondents, holding GCB Builders, Comsavings Bank, and
NHMFC jointly and severally liable. It ordered completion of the house, payment of damages, and held
NHMFC responsible for releasing the loan without verifying completion.
• The Court of Appeals affirmed the RTC's decision but absolved NHMFC of liability, reducing moral and
exemplary damages. The CA made the following findings in its decision:
 1) Comsavings Bank was held jointly and severally liable with GCB Builders.
2) Comsavings Bank committed misrepresentations in obtaining the mortgage loan from
NHMFC in the name of the respondents.
3) The bank called up Estrella Capistrano to sign various documents, including the Certificate of
House Completion and Acceptance, even before the construction started.
4) Comsavings Bank submitted false documents to NHMFC, including a photograph of a
toilet/bath with plumbing and fixtures installed, which was not true.
5) The bank also submitted photographs of wall tiles showing a different color, contradicting the
actual installation.
6) These actions by Comsavings Bank violated warranties in the purchase of the loan agreement
with NHMFC.
• Comsavings Bank further appealed to the Supreme Court.

ISSUE:

Whether Comsavings Bank was jointly and severally liable with GCB Builders based on its purchase of loan
agreement with NHMFC.

1) GCB Builders' Arguments:

a) The construction of the house had been completed a long time ago.
b) Respondents failed, despite demand, to occupy the house and pay the remaining balance of
₱46,849.94 as of August 23, 1993.
c) GCB Builders received only ₱239,355.30 out of the ₱303,000.00 loan, as the balance went to
interim interest, originator fee, service charge, and other bank charges.
2) Comsavings Bank's Argument:
a) Respondents were estopped from challenging their signing of the certificate of house
acceptance/completion on July 2, 1992, as they had the option not to pre-sign it.
b) Comsavings Bank did not make any false representations regarding the conditions and facilitation
of the loan with NHMFC.
c) The representations made were normal and regular requirements in loan processing of NHMFC's
conduit banks.
3) NHMFC's Arguments:
a) NHMFC administered the Unified Home Lending Program (UHLP) by granting financing to qualified
home borrowers through loan originators.
b) Respondents applied for and were granted a housing loan, and they executed a loan and mortgage
agreement and promissory note for ₱303,450.00 on July 2, 1992.
c) NHMFC released the loan proceeds to Comsavings Bank, the accredited originator, in accordance
with the agreement.

These arguments suggest that GCB Builders asserts completion of construction and non-payment issues,
Comsavings Bank claims compliance with standard loan processing practices, and NHMFC emphasizes its
role as a program administrator following proper procedures.

RULING:

The Supreme Court affirmed the CA’s decision. It declared that Comsavings Bank was solidarily liable with GCB
Builders based on Articles 20 and 1170 of the Civil Code.

RATIO:
• Article 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
• Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
• The Court stated that based on the provisions banking institutions like Comsavings Bank are imbued
with public interest and hence, are obliged to exercise the highest degree of diligence.
• “The stability of banks largely depends on the confidence of the people in the honesty and efficiency
of banks.”
• In this case, Comsavings Bank's acted with gross negligence in its dealings with the respondents.
• The bank failed to fulfill its legal obligation to exercise the required diligence and integrity. Specifically,
the bank presented a certificate of acceptance/completion for the respondents to sign, even though
the construction of the house had not commenced.
• This act was irregular and fraudulent as it contradicted the purpose of the certificate. By doing so, the
bank gained financial benefits while causing prejudice to the respondents.