44696336-Bank1-Notes

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

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

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BANKING LAW I I. GENERAL CONCEPTS

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

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

b. Elements: i. Engaged in lending of funds

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

(Sec. 8.2, GBL)

REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19 SCRA 58 (1967) DOCTRINE: A bank is a moneyed institute founded to facilitate the borrowing, lending and safekeeping of money and to deal in notes, bills of exchange and credits. An investment company, which lends out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank.

FACTS This is a quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337). Security Credit and Acceptance Corporation is a duly registered corporation with the SEC. Its articles of incorporation authorize it to o engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation. The Superintend of Banks of the Central Bank of the Philippines thru its legal counsel rendered an opinion that Security Credit and Acceptance Corporation is a banking institution within the purview of Republic Act No. 337. Central Bank advised the corporation to comply with the requirements of the General Banking Act. Notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, continued performing the functions and activities which had been declared to constitute illegal banking operations; the corporation established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous

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

ISSUE Whether the corporation is engaged in banking

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

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

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

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

Accordingly, defendant-corporation has violated the law by engaging in banking without securing the administrative authority required in Republic Act No. 337. That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

CENTRAL BANK v MORFE, 20 SCRA 507 (1967) DOCTRINE: The law requiring compliance with certain requirements before anybody can engage in banking obviously seeks to protect the public against actual, as well as potential, injury.



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FACTS First Mutual Savings and Loan Organization (Organization) is a registered non-stock corporation, whose main purpose is to encourage x x x and implement savings and thrift among its members, and to extend financial assistance in the form of loans to them.

In 1962, the Central Bank Legal Department rendered an opinion finding the Organization as a banking institution, falling within the purview of the Central Bank Act. Hence, it applied for a search warrant with the Municipal Court of Manila against the Organization, alleging that it was engaged in illegal banking activities, by receiving deposits of money for deposit, disbursement, safekeeping or otherwise or transacts the business of a savings and mortgage bank and/or building and loan association x x x without having first complied with the provisions of RA 337.

Judge Cancino issued the warrant applied for there being good and sufficient reasons to believe that the Organization has under its control the articles/items subject of the offense complained of. On the same day, the Organization commenced an action with the CFI of Manila against the Municipal Court, the sheriff, the Manila Police Department and the Central Bank to annul the search warrant on the ground that it was issued with GADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order in favor of the Organization.

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

ISSUE Whether the Organization is a banking institution within the purview of the Central Bank Act

RULING YES. The records suggested clearly that the transactions objected to by the Central Bank constitute the general pattern of the business of the Organization. Indeed, the main purpose thereof, according to its By-Laws, is to extend financial assistance, in the form of loans, to its members, with funds deposited by them.

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

Moreover, the power to dispose of said funds is placed under the exclusive authority of the founding members, and participating members are

expressly denied the right to vote or be voted for, their privileges and benefits being limited to those, which the BoT may in its discretion, determine from time to time. Thus, the membership of the participating members is purely nominal in nature. This situation is fraught, precisely, with the very dangers or evils, which RA 337 seeks to forestall, by exacting compliance with the requirements of said Act, before the transactions in question could be undertaken. BANAS v ASIA PACIFIC FINANCE CORPORATION, 343 SCRA 527 (2000) DOCTRINE: An investment company refers to any issuer, which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. What is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function of banking institutions.

FACTS Teodoro Banas issued a Promissory Note (P.N.), amounting to 390k payable in installments, in favor of C. G. Dizon Construction. Later, Dizon Construction endorsed the P.N to Asia Pacific Finance Corporation, an investment house. As security for the endorsement, Dizon Construction made a Chattel Mortgage over 3 heavy equipment units. As additional security, Cenen Dizon, president of Dizon Construction, executed a Continuing Undertaking, bounding himself to pay the obligation jointly and severally. At first, Dizon Construction complied with the installments. However, it defaulted in its payment of the remaining installments. Asia Pacific sued Banas and Dizon Construction for payment of the P.N.. Banas and Dizon Construction argue that the transaction was never intended to be legal but a subterfuge to conceal the loan of 390k with usurious interest. They both claim that Asia Pacific proposed the scheme with them involved because Asia Pacific could not engage in banking business. RTC ruled in favor of Asia Pacific. CA affirmed the decision. ISSUE Whether the transaction violated banking laws, hence null and void

RULING NO, it did not violate banking laws. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. securities include commercial papers evidencing indebtedness of any person, financial or non-financial entity,



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irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes. The transaction between the two was a purchase of receivables at a discount and not a loan. Such act is within the purview of the functions of an investment company. Moreover, Sec 2 of the General Banking Act provides,

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

What is prohibited by law is for investment companies to lend funds obtained from public through receipts of deposit. However, the funds obtained by Asia Pacific have not been shown to have been obtained from the public through deposits. Thus, no banking laws were violated. Upon further inspection of the 3 documents (Promissory Note / Chattel Mortgage / Continuing Undertaking) , the documents failed to prove the theory that the transaction was a loan. Petitioners are still liable for the unpaid balance of the P.N.

B. BANKING DISTINGUISHED FROM QUASI-BANKING

a. Elements of Quasi-Banking: "Quasi-Banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations (Sec. 4, Par. 3, GBL)

i. Borrowing of funds for borrowers own account ii. From 20 or more lenders at any one time iii. Through issuance, endorsement or assignment with recourse

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

other obligations

b. Requirement of Separate License: No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws (Sec. 6, Par. 1-2, GBL)

C. BANKS DISTINGUISHED FROM OTHER FINANCIAL

INSTITUTIONS a. Investment Houses: Sec. 2-3, PD 129

Section 2. Scope. Any enterprise, which engages in the underwriting of securities of other corporations, shall be considered an "Investment House" and shall be subject to the provisions of this Decree and of other pertinent laws. Nothing in this Decree shall be understood to preclude other enterprises from engaging in the mere buying and selling of short-term securities of other persons or enterprises. Section 3. Definitions. For the purpose of this Decree, unless the context otherwise indicates, the following definition of terms are hereby adopted:

(a) "Underwriting" is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. (b) "Securities" are written evidences of ownership, interest, or participation, in an enterprise, or written evidences of indebtedness of a person or enterprise. It includes, but is not limited to the instruments enumerated in Section 2 of the Securities Act (Commonwealth Act No. 83, as amended).

b. Financing Companies: "Financing companies," hereinafter called companies, are corporations, or partnerships, except those regulated by the Central Bank of the Philippines, the Insurance Commissioner and the Cooperatives Administration Office, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, either by discounting or factoring



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

c. Investment Companies: "Investment Company" means any

issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities(Sec. 4, RA 2629)

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

e. Cooperatives: A cooperative is a duly registered association of

persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles (Art. 3, RA 6938)

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

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

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

FIRST PLANTERS PAWNSHOP, INC. v CIR, 560 SCRA 606 (2008) DOCTRINE: A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage. That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. FACTS In a Pre-Assessment Notice, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST. Petitioner protested the assessment for lack of legal and factual bases. Petitioner subsequently received a Formal Assessment Notice, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest. Petitioner filed another protest but was denied. Petitioner then filed a petition for review with the Court of Tax Appeals (CTA) but it was denied. Petitioner later sought reconsideration from the CTA En Banc but was still denied thus this case. First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction.



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ISSUE Whether Petitioner is liable for the assessed VAT and DST deficiency RULING The tax liability shall be based on the tax treatment of pawnshops. The Court has ruled that they shall be treated as non-bank financial intermediaries and reasons as follows: R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks. R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks. Financial intermediaries, on the other hand, are defined as persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others. It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial intermediary in that its principal function is lending. A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage. That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of theBangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law,[34] then

petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be. Regarding the liability on DST, the court ruled that petitioner is liable for said tax. The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST. In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents, which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioners nebulous claim that it is not subject to DST is without merit.

D. NATURE OF BANKING BUSINESS The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy (Sec. 2, GBL) a. Vital Role in Economy

SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) DOCTRINE: 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. FACTS Simex was a food exporter that drew stock in the Philippines then sold it abroad. It deposited 100k in Traders Royal Bank , raising the balance to P190,380.74, then later issued checks that were suddenly dishonored California Manufacturing and others issued demand letters for the dishonored check. Simexs credit line was canceled because of the dishonored check Traders bank said the deposit of 100k was not credited, the error was rectified but Simex filed a case against the bank and demanded reparation for gross and wanton negligence: not met complaint



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for 1m moral and 500k exemplary damages + 25% atty. fees and costs CFI: moral and exemplary damages not called for, but nominal damages 20k plus 5k atty. fees affirmed by CA ISSUE Was there Gross negligence in not crediting the deposit? RULING YES. Banking system: indispensable institution in modern world; plays vital role in economic life of every civilized nation. Trusted and active associate depositor expects bank to treat account with utmost fidelity, must record each transaction accurately Fiduciary nature of relationship Traders was remiss in duty 20k moral damages, 50k exemplary (by way of example or correction for the public good) Subject to Reasonable Regulation by the State CENTRAL BANK OF THE PHILIPPINES v CA, 208 SCRA 652 (1992) DOCTRINE: It is the Governments responsibility to see to it that the financial interests of those who deal with banks and banking institutions, as depositors or otherwise, are protectedthis task is delegated to the Central Bank, which is authorized to administer monetary, banking and credit system in the Philippines. FACTS During the regular examination of the Producers Bank of the Philippines, Central Bank examiners stumbled upon some highly questionable loans which had been extended by the PBP management to several entities. Upon further examination, it was discovered that these loans, totalling approximately P300 million, were "fictitious" as they were extended, without collateral, to certain interests related to PBP owners themselves. Said loans were deemed to be anomalous particularly because the total paid-in capital of PBP at that time was only P 140.544 million. This means that the entire paid-in capital of the bank, together with some P160 million of depositors' money, was utilized by PBP management to fund these unsecured loans. Several blind items about a family-owned bank in Binondo which granted fictitious loans to its stockholders appeared in major newspapers. These news items triggered a bank-run in PBP which resulted in continuous over-drawings on the bank's demand deposit account with the Central Bank. The Monetary Board (MB), pursuant to its authority under Section 28-A of R.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBP under conservatorship. The Monetary Board gave PBP several opportunities to submit a viable rehabilitation plan in order to salvage the bank and lift the conservatorship. PBP failed to respond to the notices of the Monetary Board, hence the

conservatorship was maintained. Later on, PBP filed an action for damages against CB and MB. The suit prayed for the lifting of the conservatorship and payment of damages allegedly suffered by PBP due to the malicious and untimely declaration of conservatorship. It also prayed for a preliminary injunction /TRO against the conservatorship. RTC granted the injunction. ISSUE Whether the conservatorship was proper HELD YES. It must be stressed in this connection that the banking business is properly subject to reasonable regulation under the police power of the state because of its nature and relation to the fiscal affairs of the people and the revenues of the state. 55 Banks are affected with public interest because they receive funds from the general public in the form of deposits. Due to the nature of their transactions and functions, a fiduciary relationship is created between the banking institutions and their depositors. Therefore, banks are under the obligation to treat with meticulous care and utmost fidelity the accounts of those who have reposed their trust and confidence in them. It is then Government's responsibility to see to it that the financial interests of those who deal with banks and banking institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the Central Bank which, pursuant to its Charter, 57 is authorized to administer the monetary, banking and credit system of the Philippines. Under both the 1973 and 1987 Constitutions, the Central Bank is tasked with providing policy direction in the areas of money, banking and credit; corollarily, it shall have supervision over the operations of banks. 58 Under its charter, the CB is further authorized to take the necessary steps against any banking institution if its continued operation would cause prejudice to its depositors, creditors and the general public as well. This power has been expressly recognized by this Court. In Philippine Veterans Bank Employees Union-NUBE vs. Philippine Veterans Bank, 59 this Court held that:

. . . Unless adequate and determined efforts are taken by the government against distressed and mismanaged banks, public faith in the banking system is certain to deteriorate to the prejudice of the national economy itself, not to mention the losses suffered by the bank depositors, creditors, and stockholders, who all deserve the protection of the government. The government cannot simply cross its arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty of the Central Bank in such an event to step in and salvage the remaining resources of the bank so that they may not continue to be dissipated or plundered by those entrusted with their management.



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Strikes and Lockouts The banking industry is hereby declared as indispensable to the national interest and, not withstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same (Sec. 22, GBL) When, in his opinion, there exists a labor dispute causing or likely to cause a strike or lockout in an industry indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the dispute and decide it or certify the same to the Commission for compulsory arbitration. Such assumption or certification shall have the effect of automatically enjoining the intended or impending strike or lockout as specified in the assumption or certification order. If one has already taken place at the time of assumption or certification, all striking or locked out employees shall immediately return-to-work and the employer shall immediately resume operations and readmit all workers under the same terms and conditions prevailing before the strike or lockout. The Secretary of Labor and Employment or the Commission may seek the assistance of law enforcement agencies to ensure compliance with this provision as well as with such orders as he may issue to enforce the same. In line with the national concern for and the highest respect accorded to the right of patients to life and health, strikes and lockouts in hospitals, clinics and similar medical institutions shall, to every extent possible, be avoided, and all serious efforts, not only by labor and management but government as well, be exhausted to substantially minimize, if not prevent, their adverse effects on such life and health, through the exercise, however legitimate, by labor of its right to strike and by management to lockout. In labor disputes adversely affecting the continued operation of such hospitals, clinics or medical institutions, it shall be the duty of the striking union or locking-out employer to provide and maintain an effective skeletal workforce of medical and other health personnel, whose movement and services shall be unhampered and unrestricted, as are necessary to insure the proper and adequate protection of the life and health of its patients, most especially emergency cases, for the duration of the strike or lockout. In such cases, therefore, the Secretary of Labor and Employment may immediately assume, within twenty four (24) hours from knowledge of the occurrence of such a strike or lockout, jurisdiction over the same or certify it to the Commission for compulsory arbitration. For this purpose, the contending parties are strictly enjoined to comply with such orders, prohibitions and/or injunctions as are issued by the Secretary of Labor and Employment or the Commission, under pain of immediate disciplinary action, including dismissal

or loss of employment status or payment by the locking-out employer of backwages, damages and other affirmative relief, even criminal prosecution against either or both of them. The foregoing notwithstanding, the President of the Philippines shall not be precluded from determining the industries that, in his opinion, are indispensable to the national interest, and from intervening at any time and assuming jurisdiction over any such labor dispute in order to settle or terminate the same (Art. 263 (g), Labor Code)

b. Fiduciary Nature of Banking Business i. Degree of Diligence Required

SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) DOCTRINE: As a business affected with public interest and because of 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. FACTS Simex was a food exporter that drew stock in the Philippines then sold it abroad. It deposited 100k in Traders Royal Bank , raising the balance to P190,380.74, then later issued checks that were suddenly dishonored California Manufacturing and others issued demand letters for the dishonored check. Simexs credit line was canceled because of the dishonored check Traders bank said the deposit of 100k was not credited, the error was rectified but Simex filed a case against the bank and demanded reparation for gross and wanton negligence: not met complaint for 1m moral and 500k exemplary damages + 25% atty. fees and costs CFI: moral and exemplary damages not called for, but nominal damages 20k plus 5k atty. fees affirmed by CA ISSUE Was there Gross negligence in not crediting the deposit? RULING YES. Banking system: indispensable institution in modern world; plays vital role in economic life of every civilized nation. Trusted and active associate depositor expects bank to treat account with utmost fidelity, must record each transaction accurately Fiduciary nature of relationship Traders was remiss in duty 20k moral damages, 50k exemplary (by way of example or correction for the public good)



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BANK OF THE PHILIPPINE ISLANDS v IAC, 206 SCRA 408 (1992) DOCTRINE: The is no merit in the argument that a bank should not be considered negligent, much less held liable for damages on account of the inadvertence of its bank employees for Article 1173 of the Civil Code only requires it to exercise the diligence of a good father of the family. While the banks negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the depositors for which they are entitled to reasonable moral damages. FACTS The spouses Arthur and Vivienne Canlas opened a joint account in CBTC Q.C. with an initial deposit of P2,250. Before that, Arthur Canlas had an existing separate personal checking account there. When they opened this account, the "new accounts" teller of the bank pulled out from the bank's files the old signature card of Arthur Canlas for use as I D and reference. By mistake, she placed the old personal account number of Arthur Canlas on the deposit slip for the new joint checking account of the spouses so that the initial deposit of P2,250 for the joint checking account was miscredited to Arthur's personal account. The spouses subsequently deposited other amounts in their joint account. When Vivienne Canlas issued a check for Pl,639.89 in April 1977 and another check for P1,160.00 on June 1, 1977, one of the checks was dishonored by the bank for insufficient funds and a penalty of P20 was deducted from the account in both instances. Thereafter, the spouses filed a case for damages agaisnt the bank for serious anxiety, embarrassment and humiliation by reason of the dishonor of the checks. The RTC and the IAC found that the bank had been seriously negligent and awarded damages to the spouses Canlas. ISSUE Whether the mistake of the teller can be considered as serious negligence entitling the spouses Canlas to an award of damages. RULING YES. There is no merit in CBTC's argument that it was only required to exercise the diligence of a good father of family. The fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of it in handling the accounts entrusted to its care is a great responsibility. "In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos

or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation." The bank is not expected to be infallible but it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties with due care, as may be gathered from the testimony of the bank's lone witness, Antonio Enciso, who casually declared that "the approving officer does not have to see the account numbers and all those things. Those are very petty things for the approving manager to look into." Unfortunately, it was a "petty thing," like the incorrect account number that the bank teller wrote on the initial deposit slip for the newly-opened joint current account of the Canlas spouses, that sparked this half-a-million-peso damage suit against the bank. While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the private respondents for which they are entitled to recover reasonable moral damages.

ii. When Utmost Diligence Required 1. In dealing with Accounts of Depositors

PHILIPPINE BANKING CORPORATION v CA, 419 SCRA 487 (2004) DOCTRINE: Sec. 2 of RA 8791 (GBL) expressly imposes a fiduciary duty on the banks when it declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. The fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. FACTS Florencio Pagsaligan, a close friend and officer of the bank, persuaded Leonilo Marcos to deposit money with Philippine Banking Corporation (BANK). Marcos yielded and made a time deposit with the Bank on two occasions.



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Later, Marcos wanted to withdraw from the Bank to buy material for his construction business. However, the bank convinced him to keep his time deposit and instead, open several domestic letters of credit. Trusting the bank and Pagsaligan, he again yielded. Marcos executed 3 Trust Receipt Agreements totaling 851k. He deposited 30% of the amount of Trust Agreement as marginal deposit. He believed that the remaining 70% would be credited from his time deposit and accumulated interest. However, the bank did not offset his time deposit due to an alleged promissory note amount to 500k. The Bank demanded for the balance of the Trust Agreement from him. Due to failure to pay, several penalties and interest accumulated against Marcos. Marcos now files a complaint against the Bank. In their defense, the bank argues that the complaint was only an attempt to avoid liability under several trust receipt agreements that were subject of a criminal complaint. The RTC ruled in favor of Marcos. The CA modified the decision only by reducing the damages. ISSUE Whether the Bank is liable for damages RULING YES, the bank is liable. The bank is liable on the ground of offsetting Marcoss time deposit with a fictitious promissory note. The Bank failed to present the original copy of the note. They only presented machine copies of the duplicate. But these copies have no evidentiary value, contradicting the Best Evidence Rule. Sec 2 of the General Banking law of 2000 expressly imposes the fiduciary duty of on banks. The fiduciary nature of banking requires high standards of integrity and performance. Although the GBL only took effect in 2000, jurisprudence has already imposed the same high standard of diligence from banks at the time the Bank transacted with Marcos. This fiduciary relationship means that the banks obligation to observe high standards of integrity is deemed written into every deposit agreement between a bank and its depositor. 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. As its depositor, Marcos had the right to expect the bank was accurately recording his transactions. He also had a right to withdraw the amount in his time deposit upon maturity. Due to the banks failure to

produce the original copies of the promissory note and ledges, it failed to treat Marcoss account with meticulous care. Whether it was Pagsaligan who caused such fictitious loan agreement, it will not excuse the bank from its obligation to return the correct amount to Marcos. As stated before, 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. BANK OF THE PHILIPPINE ISLANDS v CASA MONTESSORI INTERNATIONALE, 430 SCRA 261 (2004) DOCTRINE: Since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general, the highest degree of diligence is expected and high standards of integrity and performance are even required of it. FACTS CASA Montessori International (CASA for brevity) opened a current account with defendant BPI, with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized signatories. In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00 It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious name used by third party defendant Leonardo T. 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, respondent filed the herein Complaint for Collection with Damages against defendant bank praying that the latter be ordered to reinstate the amount of P782,500.007 in the current and savings accounts of the plaintiff with interest at 6% per annum. CA apportioned the loss between BPI and CASA. The appellate court took into account CASAs 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 attorneys fees and moral and exemplary damages. ISSUE Were any of the parties negligent and therefore precluded from setting up forgery as a defense? Whether BPI is liable?



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RULING BPI is solely liable. (skipped the Negotiable Instruments part- it was established that there was indeed a forgery) xxx Having established the forgery of the drawers 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. 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 diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. 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.

2. In Selection and Supervision of Employees PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK v CA, 350 SCRA 446 (2001) DOCTRINE: Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. By the very nature of their work, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. FACTS Ford Philippines instituted actions against Citibank (drawee bank) and PCI Bank (collecting bank)

- Action #1: Ford drew and issued a Citibank check for P4.7m in 1977 in favor of the CIR for manufacturers sales tax deposited

with IBAA (later merged with PCI) and cleared by CB proceeds never reached CIR Ford forced to make 2nd payment to CIR which was received check was a crossed check for payees account only Ford wrote separate demand letters to the banks - both banks refused to pay NBI discovered that Godofredo Rivera, General Ledger Accountant of Ford recalled the check, supposedly because there was a computation error Rivera instructed PCI Bank to replace the check with 2 managers checks syndicate members deposited MCs with Pacific Banking Corp. Rivera could not be found, fugitive from justice - TC: Both banks liable, IBAA (PCI) should reimburse Citi CA: only IBAA (PCI) liable

- Action #2: Ford drew Citibank checks in 1978 (P5.851m) and 1979 (P6.311m) payable to CIR for percentage taxes both crossed checks - never reached CIR though receipts were issued, considered by BIR as fake and spurious Ford paid BIR again Godofredo Rivera (the legend returns) as Ledger Accountant prepared the check - delivered it to Remberto Castro, pro-manager of PCIB San Andres Castro and Dulay, an assistant manager of the Meralco Branch of PCI, opened a account in the name of a fictitious Reynaldo Reyes deposited a worthless Bank of America check in the same amount as the Ford check replaced the worthless check with the Ford check for clearing Reynaldo Reyes account was credited with amount same procedure with 2nd check Castro then distributed checks drawn from Reynaldo Reyes account to other conspirators RTC held Citibank liable, absolved PCI CA: affirmed

ISSUE Were the banks negligent? RULING YES. The direct perpetrators are fugitives present parties must bear the burden of loss although employees of Ford initiated the transactions, their actions are not the proximate cause of encashing the checks BoD of ford did not confirm Riveras recall of the check PCI neglected to verify authority of Rivera crossed check is a warning that it should be deposited only in CIRs account PCI liable for 4.7m check although no conscious participation, PCI is responsible frauds perpetrated by its officers Citibank should have scrutinized the checks: no clearing stamps, no initials both banks negligent in selection and supervision of their employees for 2nd and 3rd check equally liable for the loss by very nature of banking business, degree of responsibility, care and trustworthiness of bank employees is far greater than those of ordinary clerks and employees banks are expected to exercise the highest degree of diligence in the selection and supervision of employees.



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3. To be Mortgagees in Good Faith CRUZ v BANCOM FINANCE CORPORATION, 379 SCRA 490 (2002) DOCTRINE: Mortgagee-banks, unlike private individuals, are expected to exercise greater care and prudence in their dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. FACTS Edilberto Cruz and Simplicio Cruz offered to sell their parcel of land to Norma Sulit. In order to facilitate the sale, the Cruzs executed a deed of sale in favor of Candelaria Sanchez, but no consideration was paid. On the same day Candelaria Sanchez conveyed the land to Norma Sulit. Unknown to the plaintiffs, Norma managed to obtain a loan from Bancom secured by a mortgage over the land now titled in her name. Norma defaulted on her obligations to the plaintiffs and later on also defaulted on her payments with Bancom. The land was foreclosed and auctioned, Bancom was the highest bidder. Cruz then filed for reconveyance of the land. While Bancom claimed priority right over Cruz, alleging it was a mortgagee in good faith. ISSUE Whether Bancom is a mortgagee in good faith HELD NO. As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of title and is no longer required to look behind the certificate in order to determine the actual owner. Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. In Rural Bank of Compostela v. CA, we held that a bank that failed to observe due diligence was not a mortgagee in good faith. In the words of the ponencia:

x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and description. (Citations omitted)

Recently, in Adriano v. Pangilinan, we said that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate mortgages. The evidence before us indicates that respondent bank was not a mortgagee in good faith. First, at the time the property was mortgaged to it, it failed to conduct an ocular inspection. Judicial notice is taken of the standard practice for banks before they approve a loan: to send representatives to the premises of the land offered as collateral and to investigate the ownership thereof. As correctly observed by the RTC, respondent, before constituting the mortgage over the subject property, should have taken into consideration the following questions:

1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978? 2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs?

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

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

5) What benefits or prospects thereof could the ultimate owner expect out of the property? Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have discovered that possession of the land was neither with Candelaria nor with Norma.[43]

Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of Sulit and to examine the



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condition of the property she sought to mortgage.[44] It should not have simply relied on the face of the Certificate of Title to the property, as its ancillary function of investing funds required a greater degree of diligence.[45] Considering the substantial loan involved at the time, it should have exercised more caution. OMENGAN v PHILIPPINE NATIONAL BANK, 512 SCRA 305 (2007) DOCTRINE: A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. This rule is strictly applied to banking institutions. Banks should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Thus, the rule that persons dealing with registered lands can rely solely on the certificate of title does NOT apply to banks. FACTS The PNB approved the Omengan's application for a revolving credit line of P3 million. The loan was secured by two residential lots in the name of Edgar Omengan. The first P2.5 million was released on three separate dates. The release of the final half million was, however, withheld by Montalvo because of a letter allegedly sent by Edgars sisters, praying that the last half million not be realeased since:

"the property mortgaged, while in the name of Edgar Omengan, is owned in co-ownership by all the children of the late Roberto and Elnora Omengan. The lawyer who drafted the document registering the subject property under Edgars name can attest to this fact. We had a prior understanding with Edgar in allowing him to make use of the property as collateral, but he refuses to comply with such arrangement. Hence, this letter."

Nevertheless, the half million was released. Subsequently, the Omengans applied for an increase in credit line from 3 to 5 mil. This was approved subject to the condition that Edgars sisters gave their conformity. But petitioners failed to secure the consent of Edgars sisters; hence, PNB put on hold the release of the additional P2 million. Still, Edgar Omengan demanded the release of the P2 million. He claimed that the condition for its release was not part of his credit line agreement with PNB because it was added without his consent. PNB denied his request. Thus the present complaint for breach of contract and damages.

ISSUE Whether there was Breach of contract in this case RULING NO. In this case, the parties agreed on a P3 million credit line. This sum was completely released to petitioners who subsequently applied10 for an increase in their credit line. This was conditionally approved by PNBs credit committee. For all intents and purposes, petitioners sought an additional loan. The condition attached to the increase in credit line requiring petitioners to acquire the conformity of Edgars sisters was never acknowledged and accepted by petitioners. Thus, as to the additional loan, no meeting of the minds actually occurred and no breach of contract could be attributed to PNB. There was no perfected contract over the increase in credit line. The business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper information regarding its debtors. Any investigation previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering new information on the same property as security for a subsequent loan. The credit and property investigation for the original loan of P3 million did not oblige PNB to grant and release any additional loan. At the time the original P3 million credit line was approved, the title to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had reason to suspect petitioners claim of exclusive ownership. Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

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

HEIRS OF EDUARDO MANLAPAT v CA, 459 SCRA412 (2005) DOCTRINE: A mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than those contractually and legally entitled to its possession. The act of a bank of allowing complete strangers to take possession of the owners duplicate certificate even if the purpose is merely for photocopying constitutes manifest negligence which would hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code.



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FACTS Lot 2204 was originally in possession of Jose Alvarez (Eduardos grandfather). Eduardo Manalapat, Alvarezs successor-in-interest, sold a portion of it to Ricardo Cruz executing a Kasulatan and Sinumpaang Salaysay to document it. In 1976, the lot became registered only under the name of Eduardo Manalapat pursuant to a free patent. The sale of Manalapat and Cruz was forgotten, as Cruz did not even know an OCT was already issued to Manalapat. Leon Banaag, as atty-in-fact of Eduardo, executed a mortgage with Rural Bank of San Pascual for 100k with Lot 2204 as collateral. Banaag deposited the owners duplicate OCT with the bank. However, when the Cruzs heirs learned of such sale, they wanted to secure the OCT for presentation to the Register of Deeds and for issuance of a separate OCT. They urged to obtain the OCT from Manalapats heirs but were denied. Then, they went to the Rural Bank to photocopy the owners duplicate OCT deposited with the bank. The Rural banks Manager, Jose Salazar, allowed them to borrow the OCT for photocopying. Ultimately, the heirs secured a TCT for a portion of the Lot. When Banaag went to the Rural bank to tender payment of the mortgage, he learned of the actions of the Cruzs heirs that led to the subdivision of the lot and the issuance of two separate titles. 3 cases were filed with the trial court, all involving the issuance of the TCT. RTC ruled in favor of Manalapat. CA reversed and ruled in favor of Cruz and Rural Bank. ISSUE

1. Whether the cancellation of the OCT and the splitting into two separate titles may be accorded legal recognition.

2. Whether the bank is liable for letting the mortgaged document be borrowed by 3rd persons.

RULING YES, the two separate titles are valid. The heirs of Cruz have sufficiently proven their claim of ownership over a portion of Lot 2204. The fact that the Oct was not registered with their name is immaterial. Registration is not a requirement for validity of contract between parties. The principal purpose of registration is merely to notify other persons that a transaction involving the property has been entered into. The issuance of the OCT in favor of Manalapat does not disregard the fact that the Cruz owned a portion of the land. The principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title.

The issuance of the two TCT was valid. The Cruzs heirs presented to the RD the original owners duplicate of the OCT. aside from that, they presented the Kasulatan and Sinumpaang Salaysay where Manalapat acknowledge the sale in favor of Cruz. The manner of obtaining the OCT did not invalidate the TCT. The bank is liable for damages. A mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Though they rightfully acknowledged the ownership of Cruzs heirs, the bank lent the original OCT w/o prior investigation and did not even notified Manalapats heirs of the transaction. The bank should not have lent the certificate even only for the purpose of photocopying it. Such act constitutes manifest negligence on the part of the bank, which would necessarily hold it liable for damages under Art 1170 and other relevant provisions of the Civil Code. Thus, the bank is liable for 50k as nominal damages to Manalapats heirs.

iii. Applicability to Commercial Transactions Outside of Core Banking Functions

REYES v CA, 363 SCRA 51 (2001) DOCTRINE: The same higher degree of diligence is NOT expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. FACTS In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian dollars. Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia. Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia



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(Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20th Asian Racing Conference. Petitioners later went to Austraila to attend the said racing conference. Geofredo, together with other delegates, went to the Hotel Regent Sydney to register only to find out that their demand draft was dishonored. Shortly after, his wife followed and met the same fate. They were greatly inconvenienced and embarassed of the incident. Although things eventually went well, damage was already done. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar account for the purpose of reimbursing Westpac-Sydney.Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the demand draft was not honored. It was later found out that the source of the problem was Westpac-Sydneys decoding error. (7 was encoded as 1 in the SWIFT message) They sued the respondent bank for damages for the said incident. ISSUE Whether the respondent bank is liable for damages RULING NO. There is no basis to hold the respondent bank liable for damages for the reason that it exerted every effort for the subject foreign exchange demand draft to be honored. It was in fact due to erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message which led to the problem. Also, The peitioners were briefed by a representative of the respondent bank regarding the porcedure thus they are estopped from the denying the said procedure. The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and its clients, the respondent should have exercised a higher degree of diligence than that expected of an ordinary prudent person in the handling of its affairs as in the case at bar.

In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

iv. Applicability to Government Financial Institutions GSIS v SANTIAGO, 414 SCRA 563 (2003) Due diligence required of banks extend even to persons, or institutions regularly engaged in the business of lending money secured by real estate mortgages, such as government financial institutions. These are likewise expected to exercise greater care and prudence in its dealings, including those involving registered land.

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

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

vi. Liability for Negligence 1. Applicable Rules on Determination of Negligence

PHILIPPINE BANK OF COMMERCE v CA, 269 SCRA 695 (1997) DOCTRINE: Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be



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supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that. FACTS RMC had account in P; RMC gave funds to secretary to deposit in P!instead of doing so, secretary deposited funds in name of her husband!modus operandi: wrote the name of husband and his account number on original deposit slip, then, on duplicate slip, left name blank but filled in husbands account number!when teller asked why, she said it was because the 2nd slip would only be for personal records! when teller approved slip, shed fill in RMC under the name then change the account number!R filed action for recovery against P. ISSUE RULING 1. Negligence = omission to do something that a reasonable man would do! here, teller negligent in stamping slips w/o asking for name to be put on the duplicate!bank also negligent in not exercising proper supervision over the teller (since they didnt know until they conducted an investigation that the teller was doing that) 2. The negligence of the bank was the proximate cause!since even if the secretary filled out the slip wrong, she would never have gotten away with it had the slips not been approved by the teller 3. Bank also liable under last clear chance 4. But, since RMC contributorily negligent, damages reduced CONSOLIDATED BANK AND TRUST CORPORATION v CA, 410 SCRA 562 (2003) DOCTRINE: In culpa contractual (negligence), once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The Doctrine of Last Clear Chance is inapplicable in culpa contractual because neither the contributory negligence of one party (bank) nor its last chance to avoid the loss would exonerate the other party (depositor) from liability. Such contributory negligence or last chance merely serves to reduce the recovery of damages by the plaintiff but does NOT exculpate the depositor from his breach of contract. FACTS LC Diaz, an accounting firm, through its cashier Macaraya, filled up a deposit slip and a savings deposit slip. Macaraya instructed the messenger, Calapre to deposit the money with Solidbank. Macaraya also gave Calapre

the Solidbank passbook. At the bank, Calapre gave the passbook to the teller and went out to do another errand. When Calapre returned and asked for the passbook, the teller told (redundant teller-told) him that somebody got the passbook. Calapre reported the incident to Macaraya. Later on, it was discovered that an unauthorized withdrawal of P300,000.00 was made using the lost passbook. LC Diaz demanded from Solidbank the return of the money. Solidbank solidly refused prompting LC Diaz to file a recovery suit. RTC absolved Solidbank based on the rules on savings account which gives presumption that the holder of the passbook is the owner. CA held Solidbank liable based on negligence and culpa aquiliana. ISSUE Whether Solidbank is liable for the loss HELD YES. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan.[17] Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA 8791),[18] which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.[19] This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals,[20] holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.[21] This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a



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family.[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence[23] at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791. However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.[24] The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

2. Award of Actual, Moral, Compensatory or Temperate Damages

ARANETA v BANK OF AMERICA, 40 SCRA 144 (1970) DOCTRINE: The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. In the US, temperate damages are allowed. There were cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such loss. FACTS Leopoldo Araneta, a local merchant, issued a check for $500 payable to cash and drawn against Bank of America (San Francisco branch). At that time, he had a credit balance of $523.81 in his account. Unfortunately, when it was received by the bank a day after, it was dishonored due to a closed account.

Upon inquiry, the Bank of America acknowledged that it was due to an error and that for some reason, the check had been encoded with the wrong account number. Months after, Araneta issued 2 checks for $500 and $150 payable to cash and drawn against Bank of America. When these checks were presented for payment, they were again dishonored due to a closed account. The check of $500 was actually paid by the Bank of America to First National City Bank. However, Bank of America claimed that such had been inadvertently made and returned the check to First National City Bank, with the request that the amount be credited to Bank of America. In turn, First National City Bank informed the depositor (Saldana) about the checks return. However, before Saldana even replied, Bank of America recalled the check and honored it. Because of these incidents, Araneta, through counsel, sent a letter to the Bank of America demanding damages in the sum of $20,000. Although it admitted its responsibility for the inconvenience, the bank claimed that the damages sought were excessive and instead offered to ay $2,000. Thus, in 1962, Araneta filed a complaint against the Bank of America for the recovery of (1) actual damages, (2) moral damages, (3) temperate damages, (4) exemplary damages, and (5) attorneys fees for an aggregate total of $120,000. The trial court awarded all the damages prayed for, but the Court of Appeals eliminated the award of compensatory and temperate damages, and reduced the amount of moral damages, exemplary damages, and attorneys fees. ISSUE Whether temperate and moral damages should be awarded to Araneta RULING TEMPERATE DAMAGES: YES. The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. The incidents obviously affected the credit of Araneta with Saldana and with any other person who would come to know about the refusal of the defendant to honor said checks. It cannot hardly be possible that a customers check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury x x x.



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In the US, temperate damages are allowed. There were cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is convinced that there has been such loss. For instance, injury to ones commercial credit or to the goodwill of the business firm is often hard to show with certainty in terms of money. MORAL DAMAGES: YES. Under Art. 2217 of the Civil Code, besmirched reputation is a ground upon which moral damages can be claimed, but the Court of Appeals did take this element into consideration. Quoting from its decision, x x x the damages to his reputation as an established and well-known international trader entitled him to recover moral damages x x x his wounded feelings and the mental anguish suffered by him cause his blood pressure to rise beyond normal limits, x x x PRUDENTIAL BANK v CA, 328 SCRA 264 (2000) DOCTRINE: The banks negligence was the result of a lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking. While the banks negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment, and humiliation. Hence, the offended party is entitled to recover reasonable moral damages. The law allows the grant of exemplary damages by way of example for the public good. The public relies on the banks sworn profession of diligence and meticulousness in giving irreproachable service. This meticulousness must be maintained at all times by the banking sector. FACTS Leticia Tupasi-Valenzula opened a Savings Account and Current Account with Prudential Bank. Initially, she deposited a check amounting to 35k on June 1, 1988. As payment for purchasing jewelry, Leticia issued a check amounting to 11.5k in favor of Belen Legaspi. Belen then endorsed the check to Philip Lhuillier. When Philip deposited the check in his account, the check was dishonored due to insufficient funds. Leticia was surprised to learn of the dishonor of the check. She inquired with Prudential Bank, showing her passbook indicating she had sufficient funds. However, Albert Angeles Reyes (OIC of her account) ignored the passbook, stating that the bank ledger was the best proof that she did not have enough funds. However, it was found out that the 35k check initially deposited by Leticia was credited only on June 24, 1988, or after 23 days. The 11k check was redeposited and properly cleared only on June 27, 1988. Leticia filed a complaint against Prudential Bank due to the incident for causing embarrassment and humiliation.

RTC dismissed the complaint. However, CA reversed the decision, making Prudential Bank liable for damages. ISSUE Whether Prudential bank is liable for damages RULING YES, the bank is liable. It is the banks fault for misposting the initial check to another account and delayed the posting of the same to the Leticias account. Although the mistake was not attended with malice and bad faith, there is still clear proof of lack of supervision or due care and caution expected of a bank. The relationship between a bank and depositor is fiduciary in nature. The extent of diligence expected from the bank is with utmost fidelity. As a business affected with public interest and due to its nature, a bank is under obligation to treat the account of its depositors with meticulous care. It does not matter whether the account consists of only a few hundred pesos or of millions of pesos. In this case, even if there was no malice, the fact still remain that Leticia experienced serious anxiety, embarrassment and humiliation. Thus, she is entitled to recover damages; 100k for moral, 20k for exemplary 30k for attys fees. CITYTRUST BANKING CORPORATION v VILLANUEVA, 361 SCRA 446 (2001) DOCTRINE: Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendants wrongful act or omission. Requisites for the award of moral damages:

1. There must be an injury, whether physical, mental, or psychological, clearly sustained by the claimant

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 4. The award of damages is predicated on any of the cases stated in

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



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analogous cases:

1. A criminal offense resulting in physical injuries; 2. Quasi-delicts causing physical injuries; 3. Seduction, abduction, rape, or other lascivious acts; 4. Adultery or concubinage; 5. Illegal or arbitrary detention or arrest; 6. Illegal search; 7. Libel, slander or any other form of defamation; 8. Malicious prosecution; 9. Acts mentioned in Article 309; 10. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,

34, and 35. The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages. The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named. FACTS Sometime in February, 1984, the respondent opened a savings and a current account with the petitioner bank. On May 21, 1986, respondent ran out of checks so he requested a new checkbook from one of the respondent banks customer service representative. He then filled up a checkbook requisition slip with the obligatory particulars, except for his current account number which he could not remember. Respondent expressed his predicament and the representative assured that the bank shall look into the banks account records. Villanueva was thus later on issued a new checkbook. On June 17, 1986, Respondent Villanueva issued a P50,000 check payable to the order of Kingly Commodities Traders and Multi Resources, Inc. (hereafter Kingly) Respondent had sufficient funds in his account by the time the Kingly representative deposited his check. Despite this, the check was dishonoured for insufficient funds. Respondent notified the bank regarding the matter and the bank representative told him that they will look into the matter and instructed the former to advise Kingly to redeposit the check. The representative assured Villanueva that the check would be honoured after the sufficiency of the funds was ascertained. The check was then re-deposited but was again dishonoured. Due to this, Villanueva prayed to Kingly Commodities to give him until 5:30pm that same day to make good his check. Respondent went to the bank to personally inquire on the matter. It was found out that respondent was issued a check under another Isagani Villanueva with a different middle initial. Upon knowing this fact, the bank branch manager issued a managers check wh

Documents

44696336-Bank1-Notes