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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES
ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS|
HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC |
SIA, EMAN
1
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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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
2
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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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
3
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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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
4
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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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
5
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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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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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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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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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