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G.R. No. L-20583 January 23, 1967

REPUBLIC OF THE PHILIPPINES, petitioner,vs.SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLOTANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G.RESUELLO, RICARDO D. BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.

Office of the Solicitor General Arturo A. Alafriz and Solicitor E. M. Salva for petitioner.Sycip, Salazar, Luna, Manalo & Feliciano for respondents.Natalio M. Balboa and F. E. Evangelista for the receiver.

CONCEPCION, C.J.:

This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Securityand Acceptance Corporation for allegedly engaging in banking operations without the authority

required therefor by the General Banking Act (Republic Act No. 337). Named as respondents in thepetition are, in addition to said corporation, the following, as alleged members of its Board of Directorsand/or Executive Officers, namely:

NAME POSITION

Rosendo T. Resuello President & Chairman of the Board

Pablo Tanjutco Director

Arturo Soriano Director

Ruben Beltran Director

Bienvenido V. Zapa Director & Vice-President

Pilar G. Resuello Director & Secretary-Treasurer

Ricardo D. Balatbat Director & Auditor

Jose R. Sebastian Director & Legal Counsel

Vito Tanjutco Jr. Director & Personnel Manager

The record shows that the Articles of Incorporation of defendant corporation 1 were registered with theSecurities and Exchange Commission on March 27, 1961; that the next day, the Board of Directors ofthe corporation adopted a set of by-laws,2 which were filed with said Commission on April 5, 1961;that on September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippinesasked its legal counsel an opinion on whether or not said corporation is a banking institution, withinthe purview of Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legalcounsel rendered an opinion resolving the query in the affirmative; that in a letter, dated January 15,1962, addressed to said Superintendent of Banks, the corporation through its president, Rosendo T.Resuello, one of defendants herein, sought a reconsideration of the aforementioned opinion, whichreconsideration was denied on March 16, 1962; that, prior thereto, or on March 9, 1961, thecorporation had applied with the Securities and Exchange Commission for the registration andlicensing of its securities under the Securities Act; that, before acting on this application, the

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Commission referred it to the Central Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in line with which, the Commission advised the corporation on December 5, 1961,to comply with the requirements of the General Banking Act; that, upon application of members of theManila Police Department and an agent of the Central Bank, on May 18, 1962, the Municipal Court ofManila issued Search Warrant No. A-1019; that, pursuant thereto, members of the intelligencedivision of the Central Bank and of the Manila Police Department searched the premises of thecorporation and seized documents and records thereof relative to its business operations; that, uponthe return of said warrant, the seized documents and records were, with the authority of the court,

placed under the custody of the Central Bank of the Philippines; that, upon examination andevaluation of said documents and records, the intelligence division of the Central Bank submitted, tothe Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding that thecorporation is:

1. Performing banking functions, without requisite certificate of authority from the MonetaryBoard of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in that it issoliciting and accepting deposit from the public and lending out the funds so received;

2. Soliciting and accepting savings deposits from the general publicwhen the company'sarticles of incorporation authorize it only to engage primarily in financing agricultural,

commercial and industrial projects, and secondarily, in buying and selling stocks and bonds ofany corporation, thereby exceeding the scope of its powers and authority as granted under itscharter; consequently such acts are ultra-vires:

3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on accountthereof, without prior registration and/or licensing of such shares or securing exemptiontherefor, in violation of the Securities Act; and

4. That being a private credit and financial institution, it should come under the supervision ofthe Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, dutiesand functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of

Banking, to the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88and 89 of Republic Act 337." (Emphasis Supplied.) that upon examination and evaluation ofthe same records of the corporation, as well as of other documents and pertinent pipersobtained elsewhere, the Superintendent of Banks, submitted to the Monetary Board of theCentral Bank a memorandum dated August 28, 1962, stating inter alia.

11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in hisMemorandum to the Governor dated May 23, 1962 and in accordance with the writteninstructions of Governor Castillo dated May 31, 1962, an examination of the books and recordsof the Security Credit and Loans Organizations, Inc. seized by the combined MPD-CB teamwas conducted by this Department. The examination disclosed the following findings:

a. Considering the extent of its operations, the Security Credit and AcceptanceCorporation, Inc., receives deposits from the public regularly. Such deposits are treatedin the Corporation's financial statements as conditional subscription to capital stock.

Accumulated deposits of P5,000 of an individual depositor may be converted into stocksubscription to the capital stock of the Security Credit and Acceptance Corporation atthe option of the depositor. Sale of its shares of stock or subscriptions to its capital stockare offered to the public as part of its regular operations.

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b. That out of the funds obtained from the public through the receipt of deposits and/orthe sale of securities, loans are made regularly to any person by the Security Credit and

Acceptance Corporation.

A copy of the Memorandum Report dated July 30, 1962 of the examination made byExaminers of this Department of the seized books and records of the Corporation is attachedhereto.

12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, definesthe term, "banking institution" as follows:

Sec. 2. Only duly authorized persons and entities may engage in the lending of fundsobtained from the public through the receipts of deposits or the sale of bonds,securities, or obligations of any kind and all entities regularly conducting operationsshall 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. ...

13. Premises considered, the examination disclosed that the Security Credit and AcceptanceCorporation is regularly lending funds obtained from the receipt of deposits and/or the sale of

securities. The Corporation therefore is performing 'banking functions' as contemplated inRepublic Act No. 337, without having first complied with the provisions of said Act.

Recommendations:

In view of all the foregoing, it is recommended that the Monetary Board decide and declare:

1. That the Security Credit and Acceptance Corporation is performing banking functionswithout having first complied with the provisions of Republic Act No. 337, otherwise known asthe General Banking Act, in violation of Sections 2 and 6 thereof; and

2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) forwhatever legal actions are warranted, including, if warranted criminal action against thePersons criminally liable and/orquo warranto proceedings with preliminary injunction againstthe Corporation for its dissolution. (Emphasis supplied.)

that, acting upon said memorandum of the Superintendent of Banks, on September 14, 1962,the Monetary Board promulgated its Resolution No. 1095, declaring that the corporation isperforming banking operations, without having first complied with the provisions of Sections 2and 6 of Republic Act No. 337;3 that on September 25, 1962, the corporation was advised ofthe aforementioned resolution, but, this notwithstanding, the corporation, as well as themembers of its Board of Directors and the officers of the corporation, have been and still are

performing the functions and activities which had been declared to constitute illegal bankingoperations; that during the period from March 27, 1961 to May 18, 1962, the corporation hadestablished 74 branches in principal cities and towns throughout the Philippines; that through asystematic and vigorous campaign undertaken by the corporation, the same had managed toinduce the public to open 59,463 savings deposit accounts with an aggregate deposit ofP1,689,136.74; that, in consequence of the foregoing deposits with the corporation, its originalcapital stock of P500,000, divided into 20,000 founders' shares of stock and 80,000 preferredshares of stock, both of which had a par value of P5.00 each, was increased, in less than one(1) year, to P3,000,000 divided into 130,000 founders' shares and 470,000 preferred shares,both with a par value of P5.00 each; and that, according to its statement of assets andliabilities, as of December 31, 1961, the corporation had a capital stock aggregating

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P1,273,265.98 and suffered, during the year 1961, a loss of P96,685.29. Accordingly, onDecember 6, 1962, the Solicitor General commenced this quo warranto proceedings for thedissolution of the corporation, with a prayer that, meanwhile, a writ of preliminary injunction beissued ex parte, enjoining the corporation and its branches, as well as its officers and agents,from performing the banking operations complained of, and that a receiver be appointedpendente lite.

Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of the Central

Bank of the Philippines was appointed by this Court receiver pendente lite of defendant corporation,and upon the filing of the requisite bond, said officer assumed his functions as such receiver onSeptember 16, 1963.

In their answer, defendants admitted practically all of the allegations of fact made in the petition.They, however, denied that defendants Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran, Zapa,Balatbat and Sebastian, are directors of the corporation, as well as the validity of the opinion, ruling,evaluation and conclusions, rendered, made and/or reached by the legal counsel and the intelligencedivision of the Central Bank, the Securities and Exchange Commission, and the Superintendent ofBanks of the Philippines, or in Resolution No. 1095 of the Monetary Board, or of Search Warrant No.

A-1019 of the Municipal Court of Manila, and of the search and seizure made thereunder. By way of

affirmative allegations, defendants averred that, as of July 7, 1961, the Board of Directors of thecorporation was composed of defendants Rosendo T. Resuello, Aquilino L. Illera and Pilar G.Resuello; that on July 11, 1962, the corporation had filed with the Superintendent of Banks anapplication for conversion into a Security Savings and Mortgage Bank, with defendants Zapa,Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran and Sebastian as proposed directors, inaddition to the defendants first named above, with defendants Rosendo T. Resullo, Zapa, Pilar G.Resuello, Balatbat and Sebastian as proposed president, vice-president, secretary-treasurer, auditorand legal counsel, respectively; that said additional officers had never assumed their respectiveoffices because of the pendency of the approval of said application for conversion; that defendantsSoriano, Beltran, Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had subsequently withdrawn fromthe proposed mortgage and savings bank; that on November 29, 1962 or before the

commencement of the present proceedings the corporation and defendants Rosendo T. Resuelloand Pilar G. Resuello had instituted Civil Case No. 52342 of the Court of First Instance of Manilaagainst Purificacion Santos and other members of the savings plan of the corporation and the CityFiscal for a declaratory relief and an injunction; that on December 3, 1962, Judge Gaudencio Cloribelof said court issued a writ directing the defendants in said case No. 52342 and their representativesor agents to refrain from prosecuting the plaintiff spouses and other officers of the corporation byreason of or in connection with the acceptance by the same of deposits under its savings plan; thatacting upon a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the Court ofFirst Instance of Manila had appointed Jose Ma. Ramirez as receiver of the corporation; that, onDecember 12, 1962, said Ramirez qualified as such receiver, after filing the requisite bond; that,except as to one of the defendants in said case No. 52342, the issues therein have already been

joined; that the failure of the corporation to honor the demands for withdrawal of its depositors ormembers of its savings plan and its former employees was due, not to mismanagement ormisappropriation of corporate funds, but to an abnormal situation created by the mass demand forwithdrawal of deposits, by the attachment of property of the corporation by its creditors, by thesuspension by debtors of the corporation of the payment of their debts thereto and by an order of theSecurities and Exchange Commission dated September 26, 1962, to the corporation to stop solicitingand receiving deposits; and that the withdrawal of deposits of members of the savings plan of thecorporation was understood to be subject, as to time and amounts, to the financial condition of thecorporation as an investment firm.

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In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the anniversarypublication of defendant corporation showed that defendants Pablo Tanjutco, Arturo Soriano, RubenBeltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr. areofficers and/or directors thereof; that this is confirmed by the minutes of a meeting of stockholders ofthe corporation, held on September 27, 1962, showing that said defendants had been elected officersthereof; that the views of the legal counsel of the Central Bank, of the Securities and ExchangeCommission, the Intelligence Division, the Superintendent of Banks and the Monetary Board abovereferred to have been expressed in the lawful performance of their respective duties and have not

been assailed or impugned in accordance with law; that neither has the validity of Search WarrantNo. A-1019 been contested as provided by law; that the only assets of the corporation now consist ofaccounts receivable amounting approximately to P500,000, and its office equipment and appliances,despite its increased capitalization of P3,000,000 and its deposits amounting to not less thanP1,689,136.74; and that the aforementioned petition of the corporation, in Civil Case No. 52342 of theCourt of First Instance of Manila, for a declaratory relief is now highly improper, the defendantshaving already committed infractions and violations of the law justifying the dissolution of thecorporation.

Although, admittedly, defendant corporation has not secured the requisite authority to engage inbanking, defendants deny that its transactions partake of the nature of banking operations. It is

conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463savings account deposits have been made by the public with the corporation and its 74 branches,with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as thecorporation deemed suitable therefor. It is clear that these transactions partake of the nature ofbanking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has beendefined as:

... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitatethe borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, andcredits (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 andcharges a commission to both lender and borrower, is a bank. (Western Investment BankingCo. 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 ofcirculation 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 withoutsecuring the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation warrant its dissolution isapparent from the fact that the foregoing misuser of the corporate funds and franchise affects theessence of its business, that it is willful and has been repeated 59,463 times, and that its continuanceinflicts injury upon the public, owing to the number of persons affected thereby.

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It is urged, however, that this case should be remanded to the Court of First Instance of Manila uponthe authority ofVeraguth vs. Isabela Sugar Co. (57 Phil. 266). In this connection, it should be notedthat this Court is vested with original jurisdiction, concurrently with courts of first instance, to hear anddecide quo warranto cases and, that, consequently, it is discretionary for us to entertain the presentcase or to require that the issues therein be taken up in said Civil Case No. 52342. The Veraguthcase cited by herein defendants, in support of the second alternative, is not in point, because in saidcase there were issues of fact which required the presentation of evidence, and courts of firstinstance are, in general, better equipped than appellate courts for the taking of testimony and the

determination of questions of fact. In the case at bar, there is, however, no dispute as to the principalfacts or acts performed by the corporation in the conduct of its business. The main issue here is oneof law, namely, the legal nature of said facts or of the aforementioned acts of the corporation. For thisreason, and because public interest demands an early disposition of the case, we have deemed itbest to determine the merits thereof.

Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is,accordingly, ordered dissolved. The appointment of receiver herein issuedpendente lite is herebymade permanent, and the receiver is, accordingly, directed to administer the properties, deposits, andother assets of defendant corporation and wind up the affairs thereof conformably to Rules 59 and 66of the Rules of Court. It is so ordered.

Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

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G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,vs.THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

Don P. Porcuincula for petitioner.

San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:

We are concerned in this case with the question of damages, specifically moral and exemplarydamages. The negligence of the private respondent has already been established. All we have toascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.

The parties agree on the basic facts. The petitioner is a private corporation engaged in the

exportation of food products. It buys these products from various local suppliers and then sells themabroad, particularly in the United States, Canada and the Middle East. Most of its exports arepurchased by the petitioner on credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in itsbranch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to itsaccount in the said bank the amount of P100,000.00, thus increasing its balance as of that date toP190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but wassuprised to learn later that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. forP16,480.00:

2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount ofP3,386.73:

3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of P7,080.00;

4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the amountof P42,906.00:

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in theamount of P12,953.00:

6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount ofP27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount ofP4,385.02: and

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00. 2

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As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter ofdemand to the petitioner, threatening prosecution if the dishonored check issued to it was not madegood. It also withheld delivery of the order made by the petitioner. Similar letters were sent to thepetitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, onJune 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future paymentsbe made by it in cash or certified check. Meantime, action on the pending orders of the petitioner withthe other suppliers whose checks were dishonored was also deferred.

The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that thesum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. Theerror was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited. 4

In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its"gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in thethen Court of First Instance of Rizal claiming from the private respondent moral damages in the sumof P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, andcosts.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damageswere not called for under the circumstances. However, observing that the plaintiff's right had beenviolated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plusP5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6

The respondent court found with the trial court that the private respondent was guilty of negligencebut agreed that the petitioner was nevertheless not entitled to moral damages. It said:

The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit ofP100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor ofplaintiff-appellant in less than a month. The dishonored checks were eventually paid. These

circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faithand negligence on the part of the defendant-appellant.

It is this ruling that is faulted in the petition now before us.

This Court has carefully examined the facts of this case and finds that it cannot share some of theconclusions of the lower courts. It seems to us that the negligence of the private respondent had beenbrushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. Wefeel it is not enough to say that the private respondent rectified its records and credited the deposit inless than a month as if this were sufficient repentance. The error should not have been committed inthe first place. The respondent bank has not even explained why it was committed at all. It is true that

the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this tookalmost a month when, properly, the checks should have been paid immediately upon presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack ofpromptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisicalattitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith,that the respondent court said had not been established by the petitioner.

We also note that while stressing the rectification made by the respondent bank, the decisionpractically ignored the prejudice suffered by the petitioner. This was simply glossed over if not,indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not

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acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputationwas tarnished. Its standing was reduced in the business community. All this was due to the fault ofthe respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) forinjury to the plaintiff s business standing or commercial credit." There is no question that the petitionerdid sustain actual injury as a result of the dishonored checks and that the existence of the loss havingbeen established "absolute certainty as to its amount is not required." 7 Such injury should bolster all

the more the demand of the petitioner for moral damages and justifies the examination by this Courtof the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate theplaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking suchdamages for the prejudice sustained by it as a result of the private respondent's fault. The respondentcourt said that the claimed losses are purely speculative and are not supported by substantialevidence, but if failed to consider that the amount of such losses need not be established withexactitude precisely because of their nature. Moral damages are not susceptible of pecuniaryestimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss isnecessary in order that moral, nominal, temperate, liquidated or exemplary damages may be

adjudicated." That is why the determination of the amount to be awarded (except liquidated damages)is left to the sound discretion of the court, according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount ofP1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name thatprestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitledto moral damages because, not being a natural person, it cannot experience physical suffering orsuch sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The onlyexception to this rule is where the corporation has a good reputation that is debased, resulting in itssocial humiliation. 9

We shall recognize that the petitioner did suffer injury because of the private respondent's negligencethat caused the dishonor of the checks issued by it. The immediate consequence was that its prestigewas impaired because of the bouncing checks and confidence in it as a reliable debtor wasdiminished. The private respondent makes much of the one instance when the petitioner was sued ina collection case, but that did not prove that it did not have a good reputation that could not bemarred, more so since that case was ultimately settled. 10 It does not appear that, as the privaterespondent would portray it, the petitioner is an unsavory and disreputable entity that has no goodname to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not theproper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal

damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded bythe defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintifffor any loss suffered by him." As we have found that the petitioner has indeed incurred loss throughthe fault of the private respondent, the proper remedy is the award to it of moral damages, which weimpose, in our discretion, in the same amount of P20,000.00.

Now for the exemplary damages.

The pertinent provisions of the Civil Code are the following:

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Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the publicgood, in addition to the moral, temperate, liquidated or compensatory damages.

Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendantacted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

The banking system is an indispensable institution in the modern world and plays a vital role in theeconomic life of every civilized nation. Whether as mere passive entities for the safekeeping andsaving of money or as active instruments of business and commerce, banks have become anubiquitous presence among the people, who have come to regard them with respect and evengratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated toentrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and willeven earn some interest for him. The ordinary person, with equal faith, usually maintains a modestchecking account for security and convenience in the settling of his monthly bills and the payment ofordinary expenses. As for business entities like the petitioner, the bank is a trusted and activeassociate that can help in the running of their affairs, not only in the form of loans when needed butmore often in the conduct of their day-to-day transactions like the issuance or encashment of checks.

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

The point is that as a business affected with public interest and because of the nature of its functions,the bank is under obligation to treat the accounts of its depositors with meticulous care, alwayshaving in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that therespondent bank was remiss in that duty and violated that relationship. What is especially deplorableis that, having been informed of its error in not crediting the deposit in question to the petitioner, the

respondent bank did not immediately correct it but did so only one week later or twenty-three daysafter the deposit was made. It bears repeating that the record does not contain any satisfactoryexplanation of why the error was made in the first place and why it was not corrected immediatelyafter its discovery. Such ineptness comes under the concept of the wanton manner contemplated inthe Civil Code that calls for the imposition of exemplary damages.

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

ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is orderedto pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, andexemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in theamount of P5,000.00, and costs.

SO ORDERED.

Narvasa, Gancayco, Grino-Aquino and Medialdea, JJ., concur.

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G.R. No. 118492 August 15, 2001

GREGORIO H. REYES and CONSUELO PUYAT-REYES,petitioners,vs.THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29, 1994of the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the RegionalTrial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of petitionersspouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and Trust Company.

The undisputed facts of the case are as follows:

In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australiathe Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. PetitionerGregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sentGodofredo 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 amountOne Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th AsianRacing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's assistant cashier,Mr. Yasis, who at first denied the application for the reason that respondent bank did not have an Australiandollar account in any bank in Sydney. Godofredo asked if there could be a way for respondent bank toaccommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of respondent bank theninformed Godofredo of a roundabout way of effecting the requested remittance to Sydney thus: the respondentbank would draw a demand draft against Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) andhave 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'sand the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting throughGodofredo, agreed to this arrangement or approach in order to effect the urgent transfer of Australian dollarspayable to the Secretariat of the 20th Asian Racing Conference.

On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign ExchangeDemand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten AustralianDollars (AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney,Australia, and addressed to Westpac-Sydney as the drawee bank.1wphi1.nt

On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD No.

209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account held withWestpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank informing thelatter that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00)was debited. On August 19, 1988, in response to PRCI's complaint about the dishonor of the said foreignexchange demand draft, respondent bank informed Westpac-Sydney of the issuance of the said demand draftFXDD No. 209968, drawn against the Wespac-Sydney and informing the latter to be reimbursed from therespondent bank's dollar account in Westpac-New York. The respondent bank on the same day likewiseinformed Wespac-New York requesting the latter to honor the reimbursement claim of Wespac-Sydney. OnSeptember 14, 1988, upon its second presentment for payment, FXDD No. 209968 was again dishonored byWestpac-Sydney for the same reason, that is, that the respondent bank has no deposit dollar account with thedrawee Wespac-Sydney.

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On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes andConsuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H.Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel RegentSydney to register as a conference delegate. At the registration desk, in the presence of other delegates fromvarious member of the conference secretariat that he could not register because the foreign exchange demanddraft for his registration fee had been dishonored for the second time. A discussion ensued in the presence andwithin the hearing of many delegates who were also registering. Feeling terribly embarrassed and humiliated,petitioner Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject

foreign exchange demand draft that had been dishonored as well as the covering letter after which he promisedthat he would pay the registration fees in cash. In the meantime he demanded that he be given his name plateand conference kit. The lady member of the conference secretariat relented and gave him his name plate andconference kit. It was only two (2) days later, or on September 20, 1988, that he was given the dishonoreddemand draft and a covering letter. It was then that he actually paid in cash the registration fees as he had earlierpromised.

Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too wasembarassed and humiliated at the registration desk of the conference secretariat when she was told in thepresence and within the hearing of other delegates that she could not be registered due to the dishonor of thesubject foreign exchange demand draft. She felt herself trembling and unable to look at the people around her.

Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling the secretariatmember that he had already arranged for the payment of the registration fee in cash once he was shown thedishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate and conference kit.

At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House ofRepresentatives representing the lone Congressional District of Makati, Metro Manila. She has been an officerof the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady banker ofthe year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also been awarded aplaque of appreciation from the Philippine Tuberculosis Society for her extraordinary service as the Society'scampaign chairman for the ninth (9th) consecutive year.

On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaintfor damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the dishonor of the saidforeign exchange demand draft issued by the respondent bank. The petitioners claim that as a result of thedishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mentalanguish in a foreign country, and in the presence of an international audience.

On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) andagainst the plaintiffs (herein petitioners), the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's complaint,and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of P50,000.00, as reasonable

attorney's fees. Costs against the plaintiff.

SO ORDERED.5

The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the appellatecourt affirmed the decision of the trial court but in effect deleted the award of attorney's fees to the defendant(herein respondent bank) and the pronouncement as to the costs. The decretal portion of the decision of theappellate court states:

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WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is herebyAFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncementas to costs.

SO ORDERED.6

According to the appellate court, there is no basis to hold the respondent bank liable for damages for the reasonthat it exerted every effort for the subject foreign exchange demand draft to be honored. The appellate court

found and declared that:

xxx xxx xxx

Thus, the Bank had every reason to believe that the transaction finally went through smoothly,considering that its New York account had been debited and that there was no miscommunicationbetween it and Westpac-New York. SWIFT is a world wide association used by almost all banks and isknown to be the most reliable mode of communication in the international banking business. Besides,the above procedure, with the Bank as drawer and Westpac-Sydney as drawee, and with Westpac-NewYork as the reimbursement Bank had been in place since 1960s and there was no reason for the Bank tosuspect that this particular demand draft would not be honored by Westpac-Sydney.

From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFTmessage is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message as anMT799 format. However, a closer look at the Bank's Exhs. "6" and "7" would show that despite whatappears to be an asterick written over the figure before "99", the figure can still be distinctly seen as anumber "1" and not number "7", to the effect that Westpac-Sydney was responsible for the dishonor andnot the Bank.

Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of thenumbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message sent toWespac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding the cable

message which caused the Bank's message to be sent to the wrong department, the mistake wasWestpac's, not the Bank's. The Bank had done what an ordinary prudent person is required to do in theparticular situation, although appellants expect the Bank to have done more. The Bank having doneeverything necessary or usual in the ordinary course of banking transaction, it cannot be held liable forany embarrassment and corresponding damage that appellants may have incurred.7

xxx xxx xxx

Hence, this petition, anchored on the following assignment of errors:

I

THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOTNEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN"ORDINARY PRUDENT PERSON" WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE ISIMPOSED BY LAW UPON THE BANKS.

II

THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENTFROM LIABILITY BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND

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DRAFT WAS A BREACH OF PRIVATE RESPONDENT'S WARRANTY AS THE DRAWERTHEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWNOVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT ASDUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8

The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and itsclients, the respondent should have exercised a higher degree of diligence than that expected of an ordinaryprudent person in the handling of its affairs as in the case at bar. The appellate court, according to petitioners,erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also claim that therespondent bank violate Section 61 of the Negotiable Instruments Law9 which provides the warranty of adrawer that "xxx on due presentment, the instrument will be accepted or paid, or both, according to its tenorxxx." Thus, the petitioners argue that respondent bank should be held liable for damages for violation of thiswarranty. The petitioners pray this Court to re-examine the facts to cite certain instances of negligence.

It is our view and we hold that there is no reversible error in the decision of the appellate court.

Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise onlyquestions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court ofAppeals are conclusive on the parties and not reviewable by this Court and they carry even more weight whenthe Court of Appeals affirms the factual findings of the trial court.10

The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit account withWestpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes, representing PRCI andpetitioner Gregorio H. Reyes, how the transfer of Australian dollars would be effected through Westpac-NewYork where the respondent bank has a dollar account to Westpac-Sydney where the subject foreign exchangedemand draft (FXDD No. 209968) could be encashed by the payee, the 20 th Asian Racing Conference

Secretariat. PRCI and its Vice-President for finance, petitioner Gregorio H. Reyes, through their saidrepresentative, agreed to that arrangement or procedure. In other words, the petitioners are estopped fromdenying the said arrangement or procedure. Similar arrangements have been a long standing practice in bankingto facilitate international commercial transactions. In fact, the SWIFT cable message sent by respondent bank tothe drawee bank, Westpac-Sydney, stated that it may claim reimbursement from its New York branch, Westpac-New York, where respondent bank has a deposit dollar account. The facts as found by the courts a quo showthat respondent bank did not cause an erroneous transmittal of its SWIFT cable message to Westpac-Sydney. Itwas the erroneous decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of thesubject foreign exchange demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly readthe printed figures in the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As aresult, Westpac-Sydney construed the said cable message as a format for a letter of credit, and not for a demand

draft. The appellate court correct found that "the figure before '99' can still be distinctly seen as a number '1' andnot number '7'." Indeed, the line of a "7" is in a slanting position while the line of a "1" is in a horizontalposition. Thus, the number "1" in "MT199" cannot be construed as "7".11

The evidence also shows that the respondent bank exercised that degree of diligence expected of an ordinaryprudent person under the circumstances obtaining. Prior to the first dishonor of the subject foreign exchangedemand draft, the respondent bank advised Westpac-New York to honor the reimbursement claim of Westpac-Sydney and to debit the dollar account12 of respondent bank with the former. As soon as the demand draft wasdishonored, the respondent bank, thinking that the problem was with the reimbursement and without any ideathat it was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar

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account for the purpose of reimbursing Westpac-Sydney.13Respondent bank also sent two (2) more cablemessages to Westpac-New York inquiring why the demand draft was not honored.14

With these established facts, we now determine the degree of diligence that banks are required to exert in theircommercial dealings. InPhilippine Bank of Commerce v. Court of Appeals15 upholding a long standingdoctrine, we ruled that the degree of diligence required of banks, is more than that of agood father of a familywhere the fiduciary nature of their relationship with their depositors is concerned. In other words banks are dutybound 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 theirdepositors. But the same higher degree of diligence is not expected to be exerted by banks in commercialtransactions that do not involve their fiduciary relationship with their depositors.

Considering the foregoing, the respondent bank was not required to exert more than the diligence of a goodfather of a family in regard to the sale and issuance of the subject foreign exchange demand draft. The case atbar does not involve the handling of petitioners' deposit, if any, with the respondent bank. Instead, therelationship involved was that of a buyer and seller, that is, between the respondent bank as the seller of thesubject foreign exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racingconference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreignexchange demand draft was intended for the payment of the registration fees of the petitioners as delegates of

the PRCI to the 20th Asian Racing Conference in Sydney.

The evidence shows that the respondent bank did everything within its power to prevent the dishonor of thesubject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by anemployee of the latter could not have been foreseen by the respondent bank. Being unaware that its employeeerroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has no depositaccount with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar (AU $1610.00)indicated in the foreign exchange demand draft. Thus, the respondent bank had the impression that Westpac-New York had not yet made available the amount for reimbursement to Westpac-Sydney despite the fact thatrespondent bank has a sufficient deposit dollar account with Westpac-New York. That was the reason why therespondent bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent bank's)

deposit dollar account with it and to transfer or credit the corresponding amount to Westpac-Sydney to coverthe amount of the said demand draft.

In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand draft isnot attributable to any fault of the respondent bank, whereas the petitioners appeared to be under estoppel asearlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the NegotiableInstruments Law to the case at bar. In any event, it was established that the respondent bank acted in good faithand that it did not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the Court of Appealsdid not commit any reversable error in its challenged decision.

WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is

AFFIRMED. Costs against the petitioners.

SO ORDERED.1wphi1.nt

Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

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[G.R. No. 129471. April 28, 2000]

DEVELOPMENT BANK OF THE PHILIPPINES,petitioner, vs. COURT OFAPPEALS and CARLOS CAJES, respondents.

D E C I S I O N

MENDOZA,J.: Misact

This is a petition for certiorari seeking to reverse the decision1[1] andresolution2[2] of the Court of Appeals dated August 30, 1996 and April 23,1997, respectively, declaring private respondent Carlos Cajes the owner of19.4 hectares of land embraced in TCT No. 10101 and ordering thesegregation and reconveyance of said portion to him.

The antecedent facts are as follows:

The land in dispute, consisting of 19.4 hectares located in San Miguel,Province of Bohol, was originally owned by Ulpiano Mumar, whoseownership since 1917 was evidenced by Tax Declaration No. 3840.3[3] In1950,4[4] Mumar sold the land to private respondent who was issued TaxDeclaration No. R-1475 that same year.5[5] The tax declaration was latersuperseded by Tax Declaration Nos. R-799 issued in 19616[6] and D-2247issued in 1974.7[7] Private respondent occupied and cultivated the saidland,8[8] planting cassava and camote in certain portions of the land.9[9]

In 1969, unknown to private respondent, Jose Alvarez succeeded inobtaining the registration of a parcel of land with an area of 1,512,468.00square meters,10[10] in his name for which he was issued OCT No. 546 on

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June 16, 1969.11[11] The parcel of land included the 19.4 hectares occupiedby private respondent. Alvarez never occupied nor introducedimprovements on said land.12[12]

In 1972, Alvarez sold the land to the spouses Gaudencio and RosarioBeduya to whom TCT No. 10101 was issued.13[13] That same year, thespouses Beduya obtained a loan from petitioner Development Bank of the

Philippines for P526,000.00 and, as security, mortgaged the land covered byTCT No. 10101 to the bank.14[14] In 1978, the SAAD Investment Corp., andthe SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, and thespouses Beduya personally executed another mortgage over the land infavor of petitioner to secure a loan of P1,430,000.00.15[15] Sdjad

The spouses Beduya later failed to pay their loans, as a result of which, themortgage on the property was foreclosed.16[16] In the resulting foreclosuresale held on January 31, 1985, petitioner was the highest bidder.17[17] As

the spouses Beduya failed to redeem the property, petitioner consolidatedits ownership.18[18]

It appears that private respondent had also applied for a loan frompetitioner in 1978, offering his 19.4 hectare property under Tax DeclarationNo. D-2247 as security for the loan. As part of the processing of theapplication, a representative of petitioner, Patton R. Olano, inspected theland and appraised its value.

Private respondents loan application was later approved by petitioner.19[19]

However after releasing the amount of the loan to private respondent,petitioner found that the land mortgaged by private respondent wasincluded in the land covered by TCT No. 10101 in the name of the spousesBeduya. Petitioner, therefore, cancelled the loan and demanded immediate

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payment of the amount.20[20] Private respondent paid the loan to petitionerfor which the former was issued a Cancellation of Mortgage, dated March18, 1981, releasing the property in question from encumbrance.21[21]

Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT No. 10101 was conducted bypetitioners representatives. It was then discovered that private respondent

was occupying a portion of said land. Private respondent was informed thatpetitioner had become the owner of the land he was occupying, and he wasasked to vacate the property. As private respondent refused to do so,22[22]petitioner filed a complaint for recovery of possession with damages againsthim. The case was assigned to Branch 1 of the Regional Trial Court,

Tagbilaran City,23[23] which after trial, rendered a decision, dated August22, 1989, declaring petitioner the lawful owner of the entire land covered by

TCT No. 10101 on the ground that the decree of registration was bindingupon the land.24[24] The dispositive portion of the decision reads:

WHEREFORE, foregoing considered, the court renders judgment:

1.......Declaring plaintiff bank Development Bank of the Philippinesthe true and legal owner of the land in question covered by TCTNo. 10101 farm of Gaudencio Beduya;

2.......Dismissing defendants counterclaim; Sppedsc

3.......Ordering defendant to vacate from the land in question; the

portion of which he claims to belong to him for without basis infact and law;

4.......Ordering defendant, his agents or any person representinghim or those who may claim substantial rights on the land tovacate therefrom, cease and desist from disturbing, molestingand interfering plaintiffs possession of the land in question, andfrom committing any such act as would tend to mitigate, deny ordeprive plaintiff of its ownership and possession over said land.

SO ORDERED.

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the owner of the land by virtue of the decree of registration issued in hisname. In Benin, three sets of plaintiffs filed separate complaints againstMariano Severo Tuason and J.M. Tuason & Co., Inc., praying for thecancellation of OCT No. 735 covering two parcels of land called the Sta.Mesa Estate, or Parcel 1, with an area of 8,798,617.00 square meters, andthe Diliman Estate, or Parcel 2, with an area of 15,961,246.00 squaremeters. They asked that they be declared the owners and lawful possessorsof said lands.

Benin is distinguished from this case. In the first place, Benin involved vasttracts of lands which had already been subdivided and bought by innocentpurchasers for value and in good faith at the time the claimants obtainedregistration. Secondly, when the claimants ancestors occupied the lands inquestion and declared them for tax purposes in 1944, the lands werealready covered by the tax declarations in the name of J. M. Tuason & Co.,Inc. In 1914, OCT No. 735 was issued in the name of Tuason so that, from

that time on, no possession could defeat the title of the registered owners ofthe land. Thirdly, the validity of OCT No. 735 had already been recognizedby this Court in several cases29[29] and, as a result thereof, the transfercertificates of title acquired by the innocent purchasers for value were alsodeclared valid. It was held that neither could the claimants file an action toannul these titles for not only had these actions prescribed, but the fact wasthat the claimants were also barred from doing so by laches, having filedthe complaint only in 1955, or 41 years after the issuance of OCT No. 735 to

J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registrationwhich was considered in resolving the Benin case. What was considereddecisive was the valid title or right of ownership of J. M. Tuason & Co., Inc.and that of the other innocent purchasers for value and in good faithcompared to the failure of the claimants to show their right to own orpossess the questioned properties. Sccalr

Petitioner maintains that the possession by private respondent and hispredecessor-in-interest of the 19.4 hectares of land for more than 30 yearscannot overcome the decree of registration issued in favor of itspredecessor-in-interest Jose Alvarez. Petitioner quotes the following

statement in the Benin case:

It follows also that the allegation of prescriptive title in favor ofplaintiffs does not suffice to establish a cause of action. If suchprescription was completed before the registration of the land infavor of the Tuasons, the resulting prescriptive title was cut offand extinguished by the decree of registration. If, on the contrary,the prescription was either begun or completed afterthe decree

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of registration, it conferred no title because, by express provisionof law, prescription can not operate against the registered owner(Act 496).30[30]

Petitioner would thus insist that, by virtue of the decree of registration, JoseAlvarez and those claiming title from him (i.e., the spouses Beduya)acquired ownership of the 19.4 hectares of land, despite the fact that they

neither possessed nor occupied these lands.

This view is mistaken. A consideration of the cases shows that a decree ofregistration cut off or extinguished a right acquired by a person when suchright refers to a lien or encumbrance on the land not to the right ofownership thereof which was not annotated on the certificate of titleissued thereon. Thus, Act No. 496 provides:

Sec. 39. Every person receiving a certificate of title in pursuance

of a decree of registration, and every subsequent purchaser ofregistered land who takes a certificate of title for value in goodfaith shall hold the same free of all encumbrances except thosenoted on said certificate, and any of the following encumbranceswhich may be subsisting, namely: Calrspped

First. Liens, claims, or rights arising or existing under the laws ofConstitution of the United States or of the Philippine Islands whichthe statutes of the Philippine Islands cannot require to appear ofrecord in the Registry.

Second.Taxes within two years after the same became due andpayable.

Third. Any public highway, way, private way established by law, orany Government irrigation canal or lateral thereof, where thecertificate of title does not state that the boundaries of suchhighway, way, or irrigation canal or lateral thereof, have beendetermined.

But if there are easements or other rights appurtenant to a parcelof registered land which for any reason have failed to beregistered, such easements or rights shall remain so appurtenantnotwithstanding such failure, and shall be held to pass with theland until cut off or extinguished by the registration of theservient estate, or in any other manner.

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Hence, in Cid v. Javier,31[31] it was helds:

. . . Consequently, even conceding arguendo that such aneasement has been acquired, it had been cut off and extinguishedby the registration of the servient estate under the Torrenssystem without the easement being annotated on thecorresponding certificate of title, pursuant to Section 39 of the

Land Registration Act.

This principle was reiterated in Purugganan v. Paredes32[32] which alsoinvolved an easement of light and view that was not annotated on thecertificate of title of the servient estate. Scedp

But to make this principle applicable to a situation wherein title acquired bya person through acquisitive prescription would be considered cut off andextinguished by a decree of registration would run counter to established

jurisprudence before and after the ruling in Benin. Indeed, registration hasnever been a mode of acquiring ownership over immovable property. Asearly as 1911, in the case ofCity of Manila v. Lack,33[33] the Court alreadyruled on the purpose of registration of lands, viz.:

The Court of Land Registration was created for a single purpose.The Act is entitled "An Act to provide for the adjudication andregistration of titles to lands in the Philippine Islands." The solepurpose of the Legislature in its creation was to bring the landtitles of the Philippine Islands under one comprehensive and

harmonious system, the cardinal features of which areindefeasibility of title and the intervention of the State as aprerequisite to the creation and transfer of titles and interest, withthe resultant increase in the use of land as a business asset byreason of the greater certainty and security of title. It does notcreate a title nor vestone. It simply confirms a title alreadycreated and already vested, rendering it forever indefeasible. . .

Again, in the case ofAngeles v. Samia34[34] where land was erroneouslyregistered in favor of persons who neither possessed nor occupied thesame, to the prejudice of the actual occupant, the Court held:

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. . . The purpose of the Land Registration Act, as this court hashad occasion to so state more than once, is not to create or vesttitle, but to confirm and register title already created and alreadyvested, and of course, said original certificate of title No. 8995could not have vested in the defendant more title than what wasrightfully due her and her coowners. It appearing that saidcertificate granted her much more than she expected, naturally tothe prejudice of another, it is but just that the error, which gaverise to said anomaly, be corrected (City of Manila vs. Lack, 19Phil., 324). The defendant and her coowners knew or, at least,came to know that it was through error that the original certificateof title in question was issued by the court which heard cadastralcase No. 11 of Bacolor, not only in or prior to March, 1933, butfrom the time said certificate was issued in their favor, that is,from December 15, 1921. This is evidenced by the fact that, eversince, they remained passive without even attempting to make

the least showing of ownership over the land in question untilafter the lapse of more than eleven years. The Land RegistrationAct as well as the Cadastral Act protects only the holders of a titlein good faith and does not permit its provisions to be used as ashield for the commission of fraud, or that one should enrichhimself at the expense of another (Gustilo vs. Maravilla, 48 Phil.,442; Angelo vs. Director of Lands, 49 Phil., 838). The above-statedActs do not give anybody, who resorts to the provisions thereof, abetter title than he really and lawfully has. If he happened to

obtain it by mistake or to secure, to the prejudice of his neighbor,more land than he really owns, with or without bad faith on hispart, the certificate of title, which may have been issued to himunder the circumstances, may and should be cancelled orcorrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This ispermitted by section 112 of Act No. 496, which is applicable tothe Cadastral Act because it is so provided expressly by theprovisions of section 11 of the latter Act. It cannot be otherwisebecause, as stated in the case of Domingo vs. Santos, Ongsiako,Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be

registered in the registry and reproduced in the certificate of titleissued later, do not annul the decree of registration on the groundthat it is not the plan but the land itself which is registered in theregistry. In other words, if the plan of an applicant for registrationor claimant in a cadastral case alleges that the land referred to insaid plan is 100 or 1,000 hectares, and the land which he reallyowns and desires to register in the registry is only 80 ares, hecannot claim to be the owner of the existing difference if

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afterwards he is issued a certificate of title granting him said areaof 100 or 1,000 hectares.35[35] Edpsc

The principle laid down in this 1938 case remains the prevailing doctrine, itslatest application being in the case of Reyes v. Court of Appeals36[36]wherein we ruled that the fact that a party was able to secure a title in hisfavor did not operate to vest ownership upon her of the property.

In the present case, private respondent has been in actual, open, peacefuland continuous possession of the property since 1950. This fact wascorroborated by the testimony of Eleuterio Cambangay who personallyknew that Ulpiano Mumar transferred the land covered by Tax DeclarationNo. 384037[37] in favor of private respondent in 1950.38[38] Privaterespondents claim based on actual occupation of the land is bolstered by

Tax Declaration Nos. R-1475, R-799 and D-224739[39] which were issued inhis name in 1950, 1961 and 1974, respectively. Together with his actual

possession of the land, these tax declarations constitute strong evidence ofownership of the land occupied by him. As we said in the case ofRepublicvs. Court of Appeals:40[40]

Although tax declarations or realty tax payments of property arenot conclusive evidence of ownership, nevertheless, they aregood indicia of possession in the concept of owner for no one inhis right mind would be paying taxes for a property that is not inhis actual or at least constructive possession. They constitute atleast proof that the holder has a claim of title over the property.

The voluntary declaration of a piece of property for taxationpurposes manifests not only ones sincere and honest desire toobtain title to the property and announces his adverse claimagainst the State and all other interested parties, but also theintention to contribute needed revenues to the Government. Suchan act strengthens ones bona fide claim of acquisition ofownership.

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More importantly, it was established that private respondent, having been inpossession of the land since 1950, was the owner of the property when itwas registered by Jose Alvarez in 1969, his possession tacked to that of hispredecessor-in-interest, Ulpiano Mumar, which dates back to 1917.41[41]Clearly, more than 30 years had elapsed before a decree of registration wasissued in favor of Jose Alvarez. This uninterrupted adverse possession of theland for more than 30 years could only ripen into ownership of the landthrough acquisitive prescription which is a mode of acquiring ownership andother real rights over immovable property. Prescription requires public,peaceful, uninterrupted and adverse possession of the property in theconcept of an owner for ten (10) years, in case the possession is in goodfaith and with a just title. Such prescription is called ordinary prescription,as distinguished from extraordinary prescription which requires possessionfor 30 years in case possession is without just title or is not in good faith. 42

[42] Edp

In contrast to private respondent, it has been shown that neither JoseAlvarez nor the spouses Beduya were at any time in possession of theproperty in question. In fact, despite knowledge by Gaudencio Beduya thatprivate respondent occupied this 19.4 hectares included in the area coveredby TCT No. 10101,43[43] he never instituted any action to eject or recoverpossession from the latter. Hence, it can be concluded that neither JoseAlvarez nor the spouses Beduya ever exercised any right of ownership overthe land. The fact of registration in their favor never vested in them theownership of the land in dispute. "If a person obtains a title under the

Torrens system, which includes by mistake or oversight land which can nolonger be registered under the system, he does not, by virtue of the saidcertificate alone, become the owner of the lands illegally included." 44[44]

Considering the circumstances pertaining in this case, therefore, we holdthat ownership of the 19.4 hectares of land presently occupied by privaterespondent was already vested in him and that its inclusion in OCT No. 546and, subsequently, in TCT No. 10101, was erroneous. Accordingly, the landin question must be reconveyed in favor of private respondent, the true andactual owner thereof, reconveyance being clearly the proper remedy in this

case.

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"The true owner may bring an action to have the ownership ortitle to the land judicially settled and the Court in the exercise ofits equity jurisdiction, without ordering the cancellation of the

Torrens title issued upon the patent, may direct the defendants,the registered owner to reconvey the parcel of land to the plaintiffwho has been found to be the true owner thereof." (Vital vs.Amore, 90 Phil. 955) "The reconveyance is just and proper inorder to terminate the intolerable anomaly that the patenteesshould have a torrens title for the land which they and theirpredecessors never possessed which has been possessed byNovo in the concept of owner." (Bustarga v. Novo, 129 SCRA125)45[45]

Second. Generally, an action for reconveyance based on an implied orconstructive trust, such as the instant case, prescribes in 10 years from thedate of issuance of decree of registration.46[46] However, this rule does not

apply when the plaintiff is in actual possession of the land. Thus, it has beenheld: Misedp

. . . [A]n action for reconveyance of a parcel of land based onimplied or constructive trust prescribes in ten years, the point ofreference being the date of registration of the deed or the date ofthe issuance of the certificate of title over the property, but thisrule applies only when the plaintiff or the person enforcing thetrust is not in possession of the property, since if a personclaiming to be the owner thereof is in actual possession of the

property, as the defendants are in the instant case, the right toseek reconveyance, which in effect seeks to quiet title to theproperty, does not prescribe. The reason for this is that one whois in actual possession of a piece of land claiming to be the ownerthereof may wait until his possession is disturbed or his title isattacked before taking steps to vindicate his right, the reason forthe rule being, that his undisturbed possession gives him acontinuing right to seek the aid of a court of equity to ascertainand determine the nature of the adverse claim of a third party

and its effect on his own title, which right can be claimed only byone who is in possession.47[47]

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Having been the sole occupant of the land in question, private respondentmay seek reconveyance of his property despite the lapse of more than 10years.

Nor is there any obstacle to the determination of the validity of TCT No.10101. It is true that the indefeasibility of torrens titles cannot becollaterally attacked. In the instant case, the original complaint is for

recovery of possession filed by petitioner against private respondent, not anoriginal action filed by the latter to question the validity of TCT No. 10101on which petitioner bases its right. To rule on the issue of validity in a casefor recovery of possession is tantamount to a collateral attack. However, itshould not be overlooked that private respondent filed a counterclaimagainst petitioner, claiming ownership over the land and seeking damages.Hence, we could rule on the question of the validity of TCT No. 10101 for thecounterclaim can be considered a direct attack on the same. "Acounterclaim is considered a complaint, only this time, it is the original

defendant who becomes the plaintiff. . . . It stands on the same footing andis to be tested by the same rules as if it were an independent action." 48[48]In an analogous case,49[49] we ruled on the validity of a certificate of titledespite the fact that the original action instituted before the lower court wasa case for recovery of possession. The Court reasoned that since all thefacts of the case are before it, to direct the party to institute cancellationproceedings would be needlessly circuitous and would unnecessarily delaythe termination of the controversy which has already dragged on for 20years.

Third. Petitioner nonetheless contends that an action for reconveyancedoes not lie against it, because it is an innocent purchaser for value in theforeclosure sale held in 1985.

This contention has no merit. Sec. 38 of Act No. 496, the Land RegistrationAct, provides: Misoedp

If the court after hearing finds that the applicant or adverseclaimant has title as stated in his application or adverse claim and

proper for registration, a decree of confirmation and registrationshall be entered. Every decree of registration shall bind the land,and quiet title thereto, subject only to the exceptions stated inthe following section. It shall be conclusive upon and against allpersons, including the Insular Government and all the branchesthereof, whether mentioned by name in the application, notice, orcitation, or included in the general description "To all whom it

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may concern." Such decree shall not be opened by reason of theabsence, infancy, or other disability of any person affectedthereby, nor by any proceeding in any court for reversing

judgments or decrees; subject, however, to the right of anyperson deprived of land or of any estate or interest therein bydecree of registration obtained by fraud to file in the competentCourt of First Instance a petition for review within one year afterentry of the decree, provided no innocent purchaser for value hasacquired an interest. Upon the expiration of said term of one year,every decree or certificate of title issued in accordance with thissection shall be incontrovertible. If there is any such purchaser,the decree of registration shall not be opened, but shall remain infull force and effect forever, subject only to the right of appealhereinbefore provided: Provided, however,That no decree orcertificate of title issued to persons not parties to the appeal shallbe cancelled or annulled. But any person aggrieved by such

decree in any case may pursue his remedy by action for damagesagainst the applicant or any other person for fraud in procuringthe decree. Whenever the phrase "innocent purchaser for value"or an equivalent phrase occurs in this Act, it shall be deemed toinclude an innocent lessee, mortgagee, or other encumbrancer forvalue. (As amended by Sec. 3, Act 3621; and Sec. 1, Act No.3630.) Edpmis

Succinctly put, 38 provides that a certificate of title is conclusive andbinding upon the whole world. Consequently, a buyer need not look behindthe certificate of title in order to determine who is the actual owner of theland. However, this is subject to the right of a person deprived of landthrough fraud to bring an action for reconveyance, provided that it does notprejudice the rights of an innocent purchaser for value and in good faith. "Itis a condition sine qua non for an action for reconveyance to prosper thatthe property should not have passed to the hands of an innocent purchaserfor value."50[50] The same rule applies to mortgagees, like petitioner. Thus,we held:

Where the certificate of title is in the name of the mortgagorwhen the land is mortgaged, the innocent mortgagee for valuehas the right to rely on what appears on the certificate of title. Inthe absence of anything to excite suspicion, said mortgagee isunder no obligation to look beyond the certificate and investigatethe title of the mortgagor appearing on the face of saidcertificate. Although Article 2085 of the Civil Code provides thatabsolute ownership of the mortgaged property by the mortgagor

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is essential, the subsequent declaration of a title as null and voidis not a ground for nullifying the mortgage right of a mortgagee ingood faith.51[51]

The evidence before us, however, indicates that petitioner is not amortgagee in good faith. To be sure, an innocent mortgagee is not expectedto conduct an exhaustive investigation on the history of the mortgagors

title. Nonetheless, especially in the case of a banking institution, amortgagee must exercise due diligence before entering into said contract.

Judicial notice is taken of the standard practice for banks, before approvinga loan, to send representatives to the premises of the land offered ascollateral and to investigate who are the real owners thereof. Banks, theirbusiness being impressed with public interest, are expected to exercisemore care and prudence than private individuals in their dealings, eventhose involving registered lands.52[52] Jjsc

In this case, petitioners representative, Patton R. Olano, admitted that hecame to know of the property for the first time in 1979 when he inspected itto determine whether the portion occupied by private respondent andmortgaged by the latter to petitioner was included in TCT No. 10101. Thismeans that when the land was mortgaged by the spouses Beduya in 1972,no investigation had been made by petitioner. It is clear, therefore, thatpetitioner failed to exercise due care and diligence in establishing thecondition of the land as regards its actual owners and possessors before itentered into the mortgage contract in 1972 with the Beduyas. Had it doneso, it would not have failed to discover that private respondent was

occupying the disputed portion of 19.4 hectares. For this reason, petitionercannot be considered an innocent purchaser for value when it bought theland covered by TCT No. 10101 in 1985 at the foreclosure sale.

Indeed, two circumstances negate petitioners claim that it was an innocentpurchaser for value when it bought the land in question, including theportion occupied by private respondent: (1) petitioner was already informedby Gaudencio Beduya that private respondent occupied a portion of theproperty covered by TCT No. 10101; and (2) petitioners representative

conducted an investigation of the property in 1979 to ascertain whether theland mortgaged by private respondent was included in TCT No. 10101. Inother words, petitioner was already aware that a person other than theregistered owner was in actual possession of the land when it bought thesame at the foreclosure sale. A person who deliberately ignores a significantfact which would create suspicion in an otherwise reasonable man is not an

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innocent purchaser for value. "It is a well-settled rule that a purchasercannot close his eyes to facts which should put a reasonable man upon hisguard, and then claim that he acted in good faith under the belief that therewas no defect in the title of the vendor."53[53]

Petitioner deliberately disregarded both the fact that private respondentalready occupied the property and that he was claiming ownership over the

same. It cannot feign ignorance of private respondents claim to the landsince the latter mortgaged the same land to petitioner as security for theloan he contracted in 1978 on the strength of the tax declarations issuedunder his name. Instead of inquiring into private respondents occupationover the land, petitioner simply proceeded with the foreclosure sale,pretending that no doubts surround the ownership of the land covered by

TCT No. 10101. Considering these circumstances, petitioner cannot bedeemed an innocent mortgagee/purchaser for value. As we ruled: Scjj

"The failure of appellees to take the ordinary precautions which aprudent man would have taken under the circumstances,specially in buying a piece of land in the actual, visible and publicpossession of another person, other than the vendor, constitutesgross negligence amounting to bad faith.

In this connection, it has been held that where, as in this case, theland sold is in the possession of a person other than the vendor,the purchaser is required to go beyond the certificates of title andma[k]e inquiries concerning the rights of the actual possessor.

(Citations omitted.)

. . . .

One who purchases real property which is in the actualpossession of another should, at least, make some inquiryconcerning the right of those in possession. The actual possessionby other than the vendor should, at least put the purchaser uponinquiry. He can scarcely, in the absence of such inquiry, beregarded as a bona fide purchaser as against suchpossessors."54[54]

Fourth. From the foregoing, we find that the resolution of the issue ofestoppel will not affect the outcome of this case. Petitioner claims that thefact that it approved a loan in favor of private respondent and executed amortgage contract covering the 19.4 hectares covered by tax declarations

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issued under private respondents name does not mean that it is estoppedfrom questioning the latters title. Petitioner accuses private respondent ofhaving made misrepresentations which led it to believe i