Republic of the Philippines

Supreme Court

Baguio City

 

FIRST DIVISION

 

PHILIPPINE NATIONAL BANK, G.R. No. 170865Petitioner,

- versus -

SPOUSES CHEAH CHEE CHONGand OFELIA CAMACHO CHEAH,

Respondents.

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SPOUSES CHEAH CHEE CHONG G.R. No. 170892and OFELIA CAMACHO CHEAH,

Petitioners, Present:

CORONA, C.J., Chairperson,LEONARDO-DE CASTRO,

- versus - BERSAMIN,DEL CASTILLO, andVILLARAMA, JR., JJ.

PHILIPPINE NATIONAL BANK, Promulgated:Respondent. April 25, 2012

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D E C I S I O N

 

DEL CASTILLO, J.:

 

Law favoreth diligence, and therefore, hateth folly and negligence.—Wingate’s Maxim.

In doing a friend a favor to help the latter’s friend collect the proceeds of a foreign check, a

woman deposited the check in her and her husband’s dollar account. The local bank accepted the

check for collection and immediately credited the proceeds thereof to said spouses’ account even

before the lapse of the clearing period. And just when the money had been withdrawn and

distributed among different beneficiaries, it was discovered that all along, to the horror of the

woman whose intention to accommodate a friend’s friend backfired, she and her bank had dealt

with a rubber check.

These consolidated1[1] Petitions for Review on Certiorari filed by the Philippine National

Bank (PNB)2[2] and by the spouses Cheah Chee Chong and Ofelia Camacho Cheah (spouses

Cheah)3[3] both assail the August 22, 2005 Decision4[4] and December 21, 2005 Resolution5[5]of

the Court of Appeals (CA) in CA-G.R. CV No. 63948 which declared both parties equally

negligent and, hence, should equally suffer the resulting loss. For its part, PNB questions why it

was declared blameworthy together with its depositors, spouses Cheah, for the amount wrongfully

paid the latter, while the spouses Cheah plead that they be declared entirely faultless.

 Factual Antecedents

On November 4, 1992, Ofelia Cheah (Ofelia) and her friend Adelina Guarin (Adelina) were

having a conversation in the latter’s office when Adelina’s friend, Filipina Tuazon (Filipina),

approached her to ask if she could have Filipina’s check cleared and encashed for a service fee of

2.5%.  The check is Bank of America Check No. 1906[6] under the account of Alejandria Pineda

and Eduardo Rosales and drawn by Atty. Eduardo Rosales against Bank of America Alhambra

Branch in California, USA, with a face amount of $300,000.00, payable to cash.  Because Adelina

does not have a dollar account in which to deposit the check, she asked Ofelia if she could

accommodate Filipina’s request since she has a joint dollar savings account with her Malaysian

123456

husband Cheah Chee Chong (Chee Chong) under Account No. 265-705612-2 with PNB Buendia

Branch. 

Ofelia agreed. 

That same day, Ofelia and Adelina went to PNB Buendia Branch.  They met with Perfecto

Mendiola of the Loans Department who referred them to PNB Division Chief Alberto Garin

(Garin). Garin discussed with them the process of clearing the subject check and they were told that

it normally takes 15 days.7[7] Assured that the deposit and subsequent clearance of the check is a

normal transaction, Ofelia deposited Filipina’s check.  PNB then sent it for clearing through its

correspondent bank, Philadelphia National Bank.  Five days later, PNB received a credit advice8[8]

from Philadelphia National Bank that the proceeds of the subject check had been temporarily

credited to PNB’s account as of November 6, 1992. On November 16, 1992, Garin called up

Ofelia to inform her that the check had already been cleared.9[9] The following day, PNB Buendia

Branch, after deducting the bank charges, credited $299,248.37 to the account of the spouses

Cheah.10[10] Acting on Adelina’s instruction to withdraw the credited amount, Ofelia that day

personally withdrew $180,000.00.11[11] Adelina was able to withdraw the remaining amount the

next day after having been authorized by Ofelia.12[12] Filipina received all the proceeds.

In the meantime, the Cable Division of PNB Head Office in Escolta, Manila received on

November 16, 1992 a SWIFT13[13] message from Philadelphia National Bank dated November 13,

1992 with Transaction Reference Number (TRN) 46506218, informing PNB of the return of the

subject check for insufficient funds.14[14] However, the PNB Head Office could not ascertain to

which branch/office it should forward the same for proper action. Eventually, PNB Head Office

sent Philadelphia National Bank a SWIFT message informing the latter that SWIFT message with

TRN 46506218 has been relayed to PNB’s various divisions/departments but was returned to PNB

Head Office as it seemed misrouted. PNB Head Office thus requested for Philadelphia National

7891011121314

Bank’s advice on said SWIFT message’s proper disposition.15[15] After a few days, PNB Head

Office ascertained that the SWIFT message was intended for PNB Buendia Branch.

PNB Buendia Branch learned about the bounced check when it received on November 20,

1992 a debit advice,16[16] followed by a letter17[17] on November 24, 1992, from Philadelphia

National Bank to which the November 13, 1992 SWIFT message was attached. Informed about the

bounced check and upon demand by PNB Buendia Branch to return the money withdrawn, Ofelia

immediately contacted Filipina to get the money back. But the latter told her that all the money had

already been given to several people who asked for the check’s encashment. In their effort to

recover the money, spouses Cheah then sought the help of the National Bureau of Investigation.

Said agency’s Anti-Fraud and Action Division was later able to apprehend some of the beneficiaries

of the proceeds of the check and recover from them $20,000.00. Criminal charges were then filed

against these suspect beneficiaries.18[18]

Meanwhile, the spouses Cheah have been constantly meeting with the bank officials to

discuss matters regarding the incident and the recovery of the value of the check while the cases

against the alleged perpetrators remain pending. Chee Chong in the end signed a PNB drafted19[19]

letter20[20] which states that the spouses Cheah are offering their condominium units as collaterals

for the amount withdrawn. Under this setup, the amount withdrawn would be treated as a loan

account with deferred interest while the spouses try to recover the money from those who defrauded

them. Apparently, Chee Chong signed the letter after the Vice President and Manager of PNB

Buendia Branch, Erwin Asperilla (Asperilla), asked the spouses Cheah to help him and the other

bank officers as they were in danger of losing their jobs because of the incident. Asperilla likewise

assured the spouses Cheah that the letter was a mere formality and that the mortgage will be

disregarded once PNB receives its claim for indemnity from Philadelphia National Bank.

Although some of the officers of PNB were amenable to the proposal,21[21] the same did not

materialize. Subsequently, PNB sent a demand letter to spouses Cheah for the return of the amount

15161718192021

of the check,22[22] froze their peso and dollar deposits in the amounts of P275,166.80 and

$893.46,23[23] and filed a complaint24[24] against them for Sum of Money with Branch 50 of the

Regional Trial Court (RTC) of Manila, docketed as Civil Case No. 94-71022. In said complaint,

PNB demanded payment of around P8,202,220.44, plus interests25[25] and attorney’s fees, from the

spouses Cheah.

As their main defense, the spouses Cheah claimed that the proximate cause of PNB’s injury

was its own negligence of paying a US dollar denominated check

without waiting for the 15-day clearing period, in violation of its bank practice as mandated by its

own bank circular, i.e., PNB General Circular No. 52-101/88.26[26] Because of this, spouses Cheah

averred that PNB is barred from claiming what it had lost. They further averred that it is unjust for

them to pay back the amount disbursed as they never really benefited therefrom. As counterclaim,

they prayed for the return of their frozen deposits, the recoupment of P400,000.00 representing the

amount they had so far spent in recovering the value of the check, and payment of moral and

exemplary damages, as well as attorney’s fees.

Ruling of the Regional Trial Court

The RTC ruled in PNB’s favor. The dispositive portion of its Decision27[27] dated May 20,

1999 reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Philippine National Bank [and] against defendants Mr. Cheah Chee Chong and Ms. Ofelia Camacho Cheah, ordering the latter to pay jointly and severally the herein plaintiffs’ bank the amount: 

1.              of US$298,950.25 or its peso equivalent based on Central Bank Exchange Rate prevailing at the time the proceeds of the BA Check No. 190 were withdrawn or the prevailing Central Bank Rate at the time the amount is to be reimbursed by the defendants to plaintiff or whatever is lower. This is without prejudice however, to the rights of the defendants (accommodating parties) to go against the group of Adelina Guarin, Atty. Eduardo Rosales, Filipina Tuazon, etc., (Beneficiaries- accommodated parties) who are privy to the defendants. 

No pronouncement as to costs.    No other award of damages for non[e] has been proven. 

SO ORDERED.28[28]

22232425262728

 

The RTC held that spouses Cheah were guilty of contributory negligence.

Because Ofelia trusted a friend’s friend whom she did not know and considering the amount of the

check made payable to cash, the RTC opined that Ofelia showed lack of vigilance in her dealings.

She should have exercised due care by investigating the negotiability of the check and the identity

of the drawer. While the court found that the proximate cause of the wrongful payment of the

check was PNB’s negligence in not observing the 15-day guarantee period rule, it ruled that spouses

Cheah still cannot escape liability to reimburse PNB the value of the check as an accommodation

party pursuant to Section 29 of the Negotiable Instruments Law.29[29] It likewise applied the

principle of solutio indebiti under the Civil Code. With regard to the award of other forms of

damages, the RTC held that each party must suffer the consequences of their own acts and thus left

both parties as they are.

Unwilling to accept the judgment, the spouses Cheah appealed to the CA.

Ruling of the Court of Appeals

While the CA recognized the spouses Cheah as victims of a scam who nevertheless have to

suffer the consequences of Ofelia’s lack of care and prudence in immediately trusting a stranger, the

appellate court did not hold PNB scot-free. It ruled in its August 22, 2005 Decision,30[30] viz:

As both parties were equally negligent, it is but right and just that both parties should equally suffer and shoulder the loss. The scam would not have been possible without the negligence of both parties. As earlier stated, the complaint of PNB cannot be dismissed because the Cheah spouses were negligent and Ms. Cheah took an active part in the deposit of the check and the withdrawal of the subject amounts. On the other hand, the Cheah spouses cannot entirely bear the loss because PNB allowed her to withdraw without waiting for the clearance of the check. The remedy of the parties is to go after those who perpetrated, and benefited from, the scam.

WHEREFORE, the May 20, 1999 Decision of the Regional Trial Court, Branch 5, Manila, in Civil Case No. 94-71022, is hereby REVERSED and SET ASIDE and another one entered DECLARING both parties equally negligent and should suffer and shoulder the loss.

 Accordingly, PNB is hereby ordered to credit to the peso and dollar accounts of the Cheah spouses the amount due

to them. 

SO ORDERED.31[31]  

293031

In so ruling, the CA ratiocinated that PNB Buendia Branch’s non-receipt of the SWIFT

message from Philadelphia National Bank within the 15-day clearing period is not an acceptable

excuse. Applying the last clear chance doctrine, the CA held that PNB had the last clear

opportunity to avoid the impending loss of the money and yet, it glaringly exhibited its negligence

in allowing the withdrawal of funds without exhausting the 15-day clearing period which has

always been a standard banking practice as testified to by PNB’s own officers, and as provided in its

own General Circular No. 52/101/88. To the CA, PNB cannot claim from spouses Cheah even if

the latter are accommodation parties under the law as the bank’s own negligence is the proximate

cause of the damage it sustained. Nevertheless, it also found Ofelia guilty of contributory

negligence. Thus, both parties should be made equally responsible for the resulting loss.

Both parties filed their respective Motions for Reconsideration32[32] but same were denied in

a Resolution33[33] dated December 21, 2005.

Hence, these Petitions for Review on Certiorari.

Our Ruling 

The petitions for review lack merit. Hence, we affirm the ruling of the CA.

PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day clearing period was the proximate cause of the loss.

“Proximate cause is ‘that cause, which, in natural and continuous sequence, unbroken by any

efficient intervening cause, produces the injury and without which the result would not have

occurred.’ x x x To determine the proximate cause of a controversy, the question that needs to be

asked is: If the event did not happen, would the injury have resulted? If the answer is no, then the

event is the proximate cause.”34[34]

 

323334

Here, while PNB highlights Ofelia’s fault in accommodating a stranger’s check and

depositing it to the bank, it remains mum in its release of the proceeds thereof without exhausting

the 15-day clearing period, an act which contravened established banking rules and practice.

It is worthy of notice that the 15-day clearing period alluded to is construed as 15 banking

days. As declared by Josephine Estella, the Administrative Service Officer who was the bank’s

Remittance Examiner, what was unusual in the processing of the check was that the “lapse of 15

banking days was not observed.”35[35] Even PNB’s agreement with Philadelphia National

Bank36[36] regarding the rules on the collection of the proceeds of US dollar checks refers to

“business/ banking days.” Ofelia deposited the subject check on November 4, 1992. Hence, the

15th banking day from the date of said deposit should fall on November 25, 1992. However, what

happened was that PNB Buendia Branch, upon calling up Ofelia that the check had been cleared,

allowed the proceeds thereof to be withdrawn on November 17 and 18, 1992, a week before the

lapse of the standard 15-day clearing period.

This Court already held that the payment of the amounts of checks without previously

clearing them with the drawee bank especially so where the drawee bank is a foreign bank and the

amounts involved were large is contrary to normal or ordinary banking practice.37[37] Also, in

Associated Bank v. Tan,38[38] wherein the bank allowed the withdrawal of the value of a check

prior to its clearing, we said that “[b]efore the check shall have been cleared for deposit, the

collecting bank can only ‘assume’ at its own risk x x x that the check would be cleared and paid

out.” The delay in the receipt by PNB Buendia Branch of the November 13, 1992 SWIFT message

notifying it of the dishonor of the subject check is of no moment, because had PNB Buendia Branch

waited for the expiration of the clearing period and had never released during that time the proceeds

of the check, it would have already been duly notified of its dishonor. Clearly, PNB’s disregard of

its preventive and protective measure against the possibility of being victimized by bad checks had

brought upon itself the injury of losing a significant amount of money.

 

35363738

It bears stressing that “the diligence required of banks is more than that of a Roman pater

familias or a good father of a family. The highest degree of diligence is expected.”39[39] PNB

miserably failed to do its duty of exercising extraordinary diligence and reasonable business

prudence. The disregard of its own banking policy amounts to gross negligence, which the law

defines as “negligence characterized by the want of even slight care, acting or omitting to act in a

situation where there is duty to act, not inadvertently but wilfully and intentionally with a conscious

indifference to consequences in so far as other persons may be affected.”40[40] With regard to

collection or encashment of checks, suffice it to say that the law imposes on the collecting bank the

duty to scrutinize diligently the checks deposited with it for the purpose of determining their

genuineness and regularity. “The collecting bank, being primarily engaged in banking, holds itself

out to the public as the expert on this field, and the law thus holds it to a high standard of

conduct.”41[41] A bank is expected to be an expert in banking procedures and it has the necessary

means to ascertain whether a check, local or foreign, is sufficiently funded.

Incidentally, PNB obliges the spouses Cheah to return the withdrawn money under the

principle of solutio indebiti, which is laid down in Article 2154 of the Civil Code:42[42]

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

 

“[T]he indispensable requisites of the juridical relation known as solutio indebiti, are, (a) that

he who paid was not under obligation to do so; and (b) that the payment was made by reason of an

essential mistake of fact.43[43]

In the case at bench, PNB cannot recover the proceeds of the check under the principle it

invokes. In the first place, the gross negligence of PNB, as earlier discussed, can never be equated

with a mere mistake of fact, which must be something excusable and which requires the exercise of

prudence. No recovery is due if the mistake done is one of gross negligence.

 

3940414243

The spouses Cheah are guilty of contributory negligence and are bound to share the loss with the bank

“Contributory negligence is conduct on the part of the injured party, contributing as a

legal cause to the harm he has suffered, which falls below the standard to which he is required to

conform for his own protection.”44[44]

The CA found Ofelia’s credulousness blameworthy. We agree. Indeed, Ofelia failed to

observe caution in giving her full trust in accommodating a complete stranger and this led her and

her husband to be swindled. Considering that Filipina was not personally known to her and the

amount of the foreign check to be encashed was $300,000.00, a higher degree of care is expected of

Ofelia which she, however, failed to exercise under the circumstances. Another circumstance which

should have goaded Ofelia to be more circumspect in her dealings was when a bank officer called

her up to inform that the Bank of America check has already been cleared way earlier than the 15-

day clearing period. The fact that the check was cleared after only eight banking days from the

time it was deposited or contrary to what Garin told her that clearing takes 15 days should have

already put Ofelia on guard. She should have first verified the regularity of such hasty clearance

considering that if something goes wrong with the transaction, it is she and her husband who would

be put at risk and not the accommodated party. However, Ofelia chose to ignore the same and

instead actively participated in immediately withdrawing the proceeds of the check. Thus, we are

one with the CA in ruling that Ofelia’s prior consultation with PNB officers is not enough to totally

absolve her of any liability. In the first place, she should have shunned any participation in that

palpably shady transaction.

In any case, the complaint against the spouses Cheah could not be dismissed. As PNB’s

client, Ofelia was the one who dealt with PNB and negotiated the check such that its value was

credited in her and her husband’s account. Being the ones in privity with PNB, the spouses Cheah

are therefore the persons who should return to PNB the money released to them.

 

44

All told, the Court concurs with the findings of the CA that PNB and the spouses Cheah are

equally negligent and should therefore equally suffer the loss. The two must both bear the

consequences of their mistakes.

WHEREFORE, premises considered, the Petitions for Review on Certiorari in G.R. No.

170865 and in G.R. No. 170892 are both DENIED. The assailed August 22, 2005 Decision and

December 21, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 63948 are hereby

AFFIRMED in toto.

 

SO ORDERED.

 

 

Republic of the Philippines

Supreme Court

Manila

 

FIRST DIVISION

 

EQUITABLE BANKING

CORPORATION,

G.R. No. 175350

Petitioner, Present:

LEONARDO-DE CASTRO,*

Acting Chairperson,- versus - BERSAMIN,

DEL CASTILLO,VILLARAMA, JR., andPERLAS-BERNABE,** JJ.

SPECIAL STEEL PRODUCTS,INC. and AUGUSTO L. PARDO, Promulgated:

Respondents. June 13, 2012

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D E C I S I O N

 

DEL CASTILLO, J.:

 

A crossed check with the notation “account payee only” can only be deposited in the named

payee’s account. It is gross negligence for a bank to ignore this rule solely on the basis of a third

party’s oral representations of having a good title thereto.

**

Before the Court is a Petition for Review on Certiorari of the October 13, 2006 Decision of

the Court of Appeals (CA) in CA-G.R. CV No. 62425. The dispositive portion of the assailed

Decision reads:

WHEREFORE, premises considered, the May 4, 1998 Decision of the Regional Trial Court of Pasig City, Branch 168, in Civil Case No. 63561, is hereby AFFIRMED. 

SO ORDERED.45[1]

Factual Antecedents

Respondent Special Steel Products, Inc. (SSPI) is a private domestic corporation selling steel

products. Its co-respondent Augusto L. Pardo (Pardo) is SSPI’s President and majority

stockholder.46[2]

International Copra Export Corporation (Interco) is its regular customer.47[3]

Jose Isidoro48[4] Uy, alias Jolly Uy (Uy), is an Interco employee, in charge of the purchasing

department, and the son-in-law of its majority stockholder.49[5]

Petitioner Equitable Banking Corporation (Equitable or bank) is a private domestic

corporation engaged in banking50[6] and is the depository bank of Interco and of Uy.

In 1991, SSPI sold welding electrodes to Interco, as evidenced by the following sales

invoices:

Sales Invoice No. 65042 dated February 14, 1991 for P325,976.3451[7] Sales Invoice No. 65842 dated April 11, 1991 for P345,412.8052[8] Sales Invoice No. 65843 dated April 11, 1991 for P313,845.8453[9]

The due dates for these invoices were March 16, 1991 (for the first sales invoice) and May 11, 1991

(for the others). The invoices provided that Interco would pay interest at the rate of 36% per annum

in case of delay.

454647484950515253

In payment for the above welding electrodes, Interco issued three checks payable to the order

of SSPI on July 10, 1991,54[10] July 16, 1991,55[11] and July 29, 1991.56[12] Each check was

crossed with the notation “account payee only” and was drawn against Equitable. The records do

not identify the signatory for these three checks, or explain how Uy, Interco’s purchasing officer,

came into possession of these checks.

The records only disclose that Uy presented each crossed check to Equitable on the day of its

issuance and claimed that he had good title thereto.57[13] He demanded the deposit of the checks in

his personal accounts in Equitable, Account No. 18841-2 and Account No. 03474-0.58[14]

Equitable acceded to Uy’s demands on the assumption that Uy, as the son-in-law of Interco’s

majority stockholder,59[15] was acting pursuant to Interco’s orders. The bank also relied on Uy’s

status as a valued client.60[16] Thus, Equitable accepted the checks for deposit in Uy’s personal

accounts61[17] and stamped “ALL PRIOR ENDORSEMENT AND/OR LACK OF

ENDORSEMENT GUARANTEED” on their dorsal portion.62[18] Uy promptly withdrew the

proceeds of the checks.

In October 1991, SSPI reminded Interco of the unpaid welding electrodes, amounting to

P985,234.98.63[19] It reiterated its demand on January 14, 1992.64[20] SSPI explained its

immediate need for payment as it was experiencing some financial crisis of its own. Interco replied

that it had already issued three checks payable to SSPI and drawn against Equitable. SSPI denied

receipt of these checks.

On August 6, 1992, SSPI requested information from Equitable regarding the three checks.

The bank refused to give any information invoking the confidentiality of deposits.65[21]

545556575859606162636465

The records do not disclose the circumstances surrounding Interco’s and SSPI’s eventual

discovery of Uy’s scheme. Nevertheless, it was determined that Uy, not SSPI, received the

proceeds of the three checks that were payable to SSPI. Thus, on June 30, 1993 (twenty-three

months after the issuance of the three checks), Interco finally paid the value of the three checks to

SSPI, plus a portion of the accrued interests. Interco refused to pay the entire accrued interest of

P767,345.64 on the ground that it was not responsible for the delay. Thus, SSPI was unable to

collect P437,040.35 (at the contracted rate of 36% per annum) in interest income.66[22]

SSPI and its president, Pardo, filed a complaint for damages with application for a writ of

preliminary attachment against Uy and Equitable Bank. The complaint alleged that the three

crossed checks, all payable to the order of SSPI and with the notation “account payee only,” could

be deposited and encashed by SSPI only. However, due to Uy’s fraudulent representations, and

Equitable’s indispensable connivance or gross negligence, the restrictive nature of the checks was

ignored and the checks were deposited in Uy’s account. Had the defendants not diverted the three

checks in July 1991, the plaintiffs could have used them in their business and earned money from

them. Thus, the plaintiffs prayed for an award of actual damages consisting of the unrealized

interest income from the proceeds of the checks for the two-year period that the defendants withheld

the proceeds from them (from July 1991 up to June 1993).67[23]

In his personal capacity, Pardo claimed an award of P3 million as moral damages from the

defendants. He allegedly suffered hypertension, anxiety, and sleepless nights for fear that the

government would charge him for tax evasion or money laundering. He maintained that

defendants’ actions amounted to money laundering and that it unfairly implicated his company in

the scheme. As for his fear of tax evasion, Pardo explained that the Bureau of Internal Revenue

might notice a discrepancy between the financial reports of Interco (which might have reported the

checks as SSPI’s income in 1991) and those of SSPI (which reported the income only in 1993).

Since Uy and Equitable were responsible for Pardo’s worries, they should compensate him jointly

and severally therefor.68[24]

SSPI and Pardo also prayed for exemplary damages and attorney’s fees.69[25]

66676869

In support of their application for preliminary attachment, the plaintiffs alleged that the

defendants are guilty of fraud in incurring the obligation upon which the action was brought and

that there is no sufficient security for the claim sought to be enforced in this action.70[26]

The trial court granted plaintiffs’ application.71[27] It issued the writ of preliminary

attachment on September 20, 1993,72[28] upon the filing of plaintiffs’ bond for P500,000.00. The

sheriff served and implemented the writ against the personal properties of both defendants.73[29]

Upon Equitable’s motion and filing of a counter-bond, however, the trial court eventually

discharged the attachment74[30] against it.75[31]

Equitable then argued for the dismissal of the complaint for lack of cause of action. It

maintained that interest income is due only when it is expressly stipulated in writing. Since

Equitable and SSPI did not enter into any contract, Equitable is not liable for damages, in the

form of unobtained interest income, to SSPI.76[32] Moreover, SSPI’s acceptance of Interco’s

payment on the sales invoices is a waiver or extinction of SSPI’s cause of action based on the

three checks.77[33]

Equitable further argued that it is not liable to SSPI because it accepted the three crossed

checks in good faith.78[34] Equitable averred that, due to Uy’s close relations with the drawer of the

checks, the bank had basis to assume that the drawer authorized Uy to countermand the original

order stated in the check (that it can only be deposited in the named payee’s account). Since only

Uy is responsible for the fraudulent conversion of the checks, he should reimburse Equitable for any

amounts that it may be made liable to plaintiffs.79[35]

The bank counter-claimed that SSPI is liable to it in damages for the wrongful and malicious

attachment of Equitable’s personal properties. The bank maintained that SSPI knew that the

allegation of fraud against the bank is a falsehood. Further, the bank is financially capable to meet

70717273747576777879

the plaintiffs’ claim should the latter receive a favorable judgment. SSPI was aware that the

preliminary attachment against the bank was unnecessary, and intended only to humiliate or destroy

the bank’s reputation.80[36]

Meanwhile, Uy answered that the checks were negotiated to him; that he is a holder for value

of the checks and that he has a good title thereto.81[37] He did not, however, explain how he

obtained the checks, from whom he obtained his title, and the value for which he received them.

During trial, Uy did not present any evidence but adopted Equitable’s evidence as his own.

Ruling of the Regional Trial Court 82[38]

The RTC clarified that SSPI’s cause of action against Uy and Equitable is for quasi-delict.

SSPI is not seeking to enforce payment on the undelivered checks from the defendants, but to

recover the damage that it sustained from the wrongful non-delivery of the checks.83[39]

The crossed checks belonged solely to the payee named therein, SSPI. Since SSPI did not

authorize anyone to receive payment in its behalf, Uy clearly had no title to the checks and

Equitable had no right to accept the said checks from Uy. Equitable was negligent in permitting Uy

to deposit the checks in his account without verifying Uy’s right to endorse the crossed checks. The

court reiterated that banks have the duty to scrutinize the checks deposited with it, for a

determination of their genuineness and regularity. The law holds banks to a high standard because

banks hold themselves out to the public as experts in the field. Thus, the trial court found

Equitable’s explanation regarding Uy’s close relations with the drawer unacceptable.84[40]

 

Uy’s conversion of the checks and Equitable’s negligence make them liable to compensate

SSPI for the actual damage it sustained. This damage consists of the income that SSPI failed to

realize during the delay.85[41] The trial court then equated this unrealized income with the interest

808182838485

income that SSPI failed to collect from Interco. Thus, it ordered Uy and Equitable to pay, jointly

and severally, the amount of P437,040.35 to SSPI as actual damages.86[42]

It also ordered the defendants to pay exemplary damages of P500,000.00, attorney’s fees

amounting to P200,000.00, as well as costs of suit.87[43]

The trial court likewise found merit in Pardo’s claim for moral damages. It found that Pardo

suffered anxiety, sleepless nights, and hypertension in fear that he would face criminal prosecution.

The trial court awarded Pardo the amount of P3 million in moral damages.88[44]

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Special Steel Products, Inc., and Augusto L. Pardo and against defendants Equitable Banking Corporation [and] Jose Isidoro Uy, alias “Jolly Uy,” ordering defendants to jointly and severally pay plaintiffs the following: 

1. P437,040.35 as actual damages;2. P3,000,000.00 as moral damages to Augusto L. Pardo;3. P500,000.00 as exemplary damages;4. P200,000.00 as attorney’s fees; and 5. Costs of suit.

 Defendant EBC’s counterclaim is hereby DISMISSED for lack of factual and legal basis.

 Likewise, the crossclaim filed by defendant EBC against defendant Jose Isidoro Uy and the crossclaim filed by

defendant Jose Isidoro Uy against defendant EBC are hereby DISMISSED for lack of factual and legal basis. 

SO ORDERED. 

Pasig City, May 4, 1998.89[45]

 

The trial court denied Equitable’s motion for reconsideration in its Order dated November 19,

1998.90[46]

Only Equitable appealed to the CA,91[47] reiterating its defenses below.

Appealed Ruling of the Court of Appeals92[48]

The appellate court found no merit in Equitable’s appeal.

86878889909192

It affirmed the trial court’s ruling that SSPI had a cause of action for quasi-delict against

Equitable.93[49] The CA noted that the three checks presented by Uy to Equitable were crossed

checks, and strictly made payable to SSPI only. This means that the checks could only be deposited

in the account of the named payee.94[50] Thus, the CA found that Equitable had the responsibility

of ensuring that the crossed checks are deposited in SSPI’s account only. Equitable violated this

duty when it allowed the deposit of the crossed checks in Uy’s account.95[51]

The CA found factual and legal basis to affirm the trial court’s award of moral damages in

favor of Pardo.96[52]

It likewise affirmed the award of exemplary damages and attorney’s fees in favor of SSPI.97

[53]

Issues 

1. Whether SSPI has a cause of action against Equitable for quasi-delict;

2. Whether SSPI can recover, as actual damages, the stipulated 36% per annum interest

from Equitable;

3. Whether speculative fears and imagined scenarios, which cause sleepless nights, may be

the basis for the award of moral damages; and

4. Whether the attachment of Equitable’s personal properties was wrongful.

Our Ruling

SSPI’s cause of action

This case involves a complaint for damages based on quasi-delict. SSPI asserts that it did not

receive prompt payment from Interco in July 1991 because of Uy’s wilful and illegal conversion of

the checks payable to SSPI, and of Equitable’s gross negligence, which facilitated Uy’s actions.

The combined actions of the defendants deprived SSPI of interest income on the said moneys from

9394959697

July 1991 until June 1993. Thus, SSPI claims damages in the form of interest income for the said

period from the parties who wilfully or negligently withheld its money from it.

Equitable argues that SSPI cannot assert a right against the bank based on the undelivered

checks.98[54] It cites provisions from the Negotiable Instruments Law and the case of Development

Bank of Rizal v. Sima Wei99[55] to argue that a payee, who did not receive the check, cannot require

the drawee bank to pay it the sum stated on the checks.

Equitable’s argument is misplaced and beside the point. SSPI’s cause of action is not based

on the three checks. SSPI does not ask Equitable or Uy to deliver to it the proceeds of the checks as

the rightful payee. SSPI does not assert a right based on the undelivered checks or for breach of

contract. Instead, it asserts a cause of action based on quasi-delict. A quasi-delict is an act or

omission, there being fault or negligence, which causes damage to another. Quasi-delicts exist even

without a contractual relation between the parties. The courts below correctly ruled that SSPI has a

cause of action for quasi-delict against Equitable.

The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPI’s

order, and contained the notation “account payee only.” This creates a reasonable expectation that

the payee alone would receive the proceeds of the checks and that diversion of the checks would be

averted. This expectation arises from the accepted banking practice that crossed checks are

intended for deposit in the named payee’s account only and no other.100[56] At the very least, the

nature of crossed checks should place a bank on notice that it should exercise more caution or

expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized the

holder to deposit the same in a different account. It is well to remember that “[t]he banking system

has become an indispensable institution in the modern world and plays a vital role in the economic

life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of

money or as active instruments of business and commerce, banks have attained an [sic] ubiquitous

presence among the people, who have come to regard them with respect and even gratitude and,

above all, trust and confidence. In this connection, it is important that banks should guard against

injury attributable to negligence or bad faith on its part. As repeatedly emphasized, since the

banking business is impressed with public interest, the trust and confidence of the public in it is of

9899100

paramount importance. Consequently, the highest degree of diligence is expected, and high

standards of integrity and performance are required of it.”101[57]

Equitable did not observe the required degree of diligence expected of a banking institution

under the existing factual circumstances.

The fact that a person, other than the named payee of the crossed check, was presenting it for

deposit should have put the bank on guard. It should have verified if the payee (SSPI) authorized

the holder (Uy) to present the same in its behalf, or indorsed it to him. Considering however, that

the named payee does not have an account with Equitable (hence, the latter has no specimen

signature of SSPI by which to judge the genuineness of its indorsement to Uy), the bank knowingly

assumed the risk of relying solely on Uy’s word that he had a good title to the three checks. Such

misplaced reliance on empty words is tantamount to gross negligence, which is the “absence of or

failure to exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless

disregard of consequences without exerting any effort to avoid them.”102[58]

Equitable contends that its knowledge that Uy is the son-in-law of the majority stockholder

of the drawer, Interco, made it safe to assume that the drawer authorized Uy to countermand the

order appearing on the check. In other words, Equitable theorizes that Interco reconsidered its

original order and decided to give the proceeds of the checks to Uy.103[59] That the bank arrived at

this conclusion without anything on the face of the checks to support it is demonstrative of its lack

of caution. It is troubling that Equitable proceeded with the transaction based only on its knowledge

that Uy had close relations with Interco. The bank did not even make inquiries with the drawer,

Interco (whom the bank considered a “valued client”), to verify Uy’s representation. The banking

system is placed in peril when bankers act out of blind faith and empty promises, without requiring

proof of the assertions and without making the appropriate inquiries. Had it only exercised due

diligence, Equitable could have saved both Interco and the named payee, SSPI, from the trouble that

the bank’s mislaid trust wrought for them.

Equitable’s pretension that there is nothing under the circumstances that rendered Uy’s title

to the checks questionable is outrageous. These are crossed checks, whose manner of discharge, in

101102103

banking practice, is restrictive and specific. Uy’s name does not appear anywhere on the crossed

checks. Equitable, not knowing the named payee on the check, had no way of verifying for itself

the alleged genuineness of the indorsement to Uy. The checks bear nothing on their face that

supports the belief that the drawer gave the checks to Uy. Uy’s relationship to Interco’s majority

stockholder will not justify disregarding what is clearly ordered on the checks.

Actual damages

For its role in the conversion of the checks, which deprived SSPI of the use thereof,

Equitable is solidarily liable with Uy to compensate SSPI for the damages it suffered.

Among the compensable damages are actual damages, which encompass the value of the

loss sustained by the plaintiff, and the profits that the plaintiff failed to obtain.104[60] Interest

payments, which SSPI claims, fall under the second category of actual damages.

SSPI computed its claim for interest payments based on the interest rate stipulated in its

contract with Interco. It explained that the stipulated interest rate is the actual interest income it had

failed to obtain from Interco due to the defendants’ tortious conduct.

The Court finds the application of the stipulated interest rate erroneous.

SSPI did not recover interest payments at the stipulated rate from Interco because it agreed

that the delay was not Interco’s fault, but that of the defendants’. If that is the case, then Interco is

not in delay (at least not after issuance of the checks) and the stipulated interest payments in their

contract did not become operational. If Interco is not liable to pay for the 36% per annum interest

rate, then SSPI did not lose that income. SSPI cannot lose something that it was not entitled to in

the first place. Thus, SSPI’s claim that it was entitled to interest income at the rate stipulated in its

contract with Interco, as a measure of its actual damage, is fallacious.

More importantly, the provisions of a contract generally take effect only among the parties,

their assigns and heirs.105[61] SSPI cannot invoke the contractual stipulation on interest payments

against Equitable because it is neither a party to the contract, nor an assignee or an heir to the

contracting parties.

104105

Nevertheless, it is clear that defendants’ actions deprived SSPI of the present use of its

money for a period of two years. SSPI is therefore entitled to obtain from the tortfeasors the profits

that it failed to obtain from July 1991 to June 1993. SSPI should recover interest at the legal rate of

6% per annum,106[62] this being an award for damages based on quasi-delict and not for a loan or

forbearance of money.

Moral damages

Both the trial and appellate courts awarded Pardo P3 million in moral damages. Pardo

claimed that he was frightened, anguished, and seriously anxious that the government would

prosecute him for money laundering and tax evasion because of defendants’ actions.107[63] In other

words, he was worried about the repercussions that defendants’ actions would have on him.

Equitable argues that Pardo’s fears are all imagined and should not be compensated. The

bank points out that none of Pardo’s fears panned out.108[64]

Moral damages are recoverable only when they are the proximate result of the defendant’s

wrongful act or omission.109[65] Both the trial and appellate courts found that Pardo indeed

suffered as a result of the diversion of the three checks. It does not matter that the things he was

worried and anxious about did not eventually materialize. It is rare for a person, who is beset with

mounting problems, to sift through his emotions and distinguish which fears or anxieties he should

or should not bother with. So long as the injured party’s moral sufferings are the result of the

defendants’ actions, he may recover moral damages.

The Court, however, finds the award of P3 million excessive. Moral damages are given not

to punish the defendant but only to give the plaintiff the means to assuage his sufferings with

diversions and recreation.110[66] We find that the award of P50,000.00111[67] as moral damages is

reasonable under the circumstances.

Equitable to recover amounts from Uy

106107108109110111

Equitable then insists on the allowance of their cross-claim against Uy. The bank argues that

it was Uy who was enriched by the entire scheme and should reimburse Equitable for whatever

amounts the Court might order it to pay in damages to SSPI.112[68]

Equitable is correct. There is unjust enrichment when (1) a person is unjustly benefited, and

(2) such benefit is derived at the expense of or with damages to another.113[69] In the instant case,

the fraudulent scheme concocted by Uy allowed him to improperly receive the proceeds of the three

crossed checks and enjoy the profits from these proceeds during the entire time that it was withheld

from SSPI. Equitable, through its gross negligence and mislaid trust on Uy, became an unwitting

instrument in Uy’s scheme. Equitable’s fault renders it solidarily liable with Uy, insofar as

respondents are concerned. Nevertheless, as between Equitable and Uy, Equitable should be

allowed to recover from Uy whatever amounts Equitable may be made to pay under the judgment.

It is clear that Equitable did not profit in Uy’s scheme. Disallowing Equitable’s cross-claim against

Uy is tantamount to allowing Uy to unjustly enrich himself at the expense of Equitable. For this

reason, the Court allows Equitable’s cross-claim against Uy.

Preliminary attachment

Equitable next assails as error the trial court’s dismissal of its counter-claim for wrongful

preliminary attachment. It maintains that, contrary to SSPI’s allegation in its application for the writ,

there is no showing whatsoever that Equitable was guilty of fraud in allowing Uy to deposit the

checks. Thus, the trial court should not have issued the writ of preliminary attachment in favor of

SSPI. The wrongful attachment compelled Equitable to incur expenses for a counter-bond,

amounting to P30,204.26, and caused it to sustain damage, amounting to P5 million, to its goodwill

and business credit.114[70]

SSPI submitted the following affidavit in support of its application for a writ of preliminary

attachment:

I, Augusto L. Pardo, of legal age, under oath hereby depose and declare: 

1. I am one of the plaintiffs in the above-entitled case; the other plaintiff is our family corporation, Special Steel Products, Inc., of which I am the president and majority stockholder; I caused the preparation of the foregoing Complaint, the allegations of which I have read, and which I hereby affirm to be true and correct out of my own personal knowledge;

 

112113114

2. The corporation and I have a sufficient cause of action against defendants Isidoro Uy alias Jolly Uy and Equitable Banking Corporation, who are guilty of fraud in incurring the obligation upon which this action is brought, as particularly alleged in the Complaint, which allegations I hereby adopt and reproduce herein;

 3. There is no sufficient security for our claim in this action and that the amount due us is as much as the sum for

which the order is granted above all legal counterclaims; 4. We are ready and able to put up a bond executed to the defendants in an amount to be fixed by the Court[,]

conditioned on the payment of all costs[,] which may be adjudged to defendants[,] and all damages[,] which they may sustain by reason of the attachment of the court, should [the court] finally adjudge that we are not entitled thereto.115[71]

The complaint (to which the supporting affidavit refers) cites the following factual circumstances to

justify SSPI’s application:

6. x x x Yet, notwithstanding the fact that SPECIAL STEEL did not open an account with EQUITABLE BANK as already alleged, thru its connivance with defendant UY in his fraudulent scheme to defraud SPECIAL STEEL, or at least thru its gross negligence EQUITABLE BANK consented to or allowed the opening of Account No. 18841-2 at its head office and Account No. 03474-0 at its Ermita Branch in the name of SPECIAL STEEL without the latter’s knowledge, let alone authority or consent, but obviously on the bases of spurious or falsified documents submitted by UY or under his authority, which documents EQUITABLE BANK did not bother to verify or check their authenticity with SPECIAL STEEL.116[72]

 x x x x 9. On August 6, 1992, plaintiffs, thru counsel, wrote EQUITABLE BANK about the fraudulent transactions

involving the aforesaid checks, which could not have been perpetrated without its indispensable participation and cooperation, or gross negligence, and therein solicited its cooperation in securing information as to the anomalous and irregular opening of the false accounts maintained in SPECIAL STEEL’s name, but EQUITABLE BANK malevolently shirking from its responsibility to prevent the further perpetration of fraud, conveniently, albeit unjustifiably, invoked the confidentiality of the deposits and refused to give any information, and accordingly denied SPECIAL STEEL’s valid request, thereby knowingly shielding the identity of the ma[le]factors involved [in] the unlawful and fraudulent transactions.117[73] 

The above affidavit and the allegations of the complaint are bereft of specific and definite

allegations of fraud against Equitable that would justify the attachment of its properties. In fact,

SSPI admits its uncertainty whether Equitable’s participation in the transactions involved fraud or

was a result of its negligence. Despite such uncertainty with respect to Equitable’s participation,

SSPI applied for and obtained a preliminary attachment of Equitable’s properties on the ground of

fraud. We believe that such preliminary attachment was wrongful. “[A] writ of preliminary

attachment is too harsh a provisional remedy to be issued based on mere abstractions of fraud.

Rather, the rules require that for the writ to issue, there must be a recitation of clear and concrete

factual circumstances manifesting that the debtor practiced fraud upon the creditor at the time of

the execution of their agreement in that said debtor had a preconceived plan or intention not to pay

115116117

the creditor.”118[74] No proof was adduced tending to show that Equitable had a preconceived plan

not to pay SSPI or had knowingly participated in Uy’s scheme.

That the plaintiffs eventually obtained a judgment in their favor does not detract from the

wrongfulness of the preliminary attachment. While “the evidence warrants [a] judgment in favor of

[the] applicant, the proofs may nevertheless also establish that said applicant’s proffered ground for

attachment was inexistent or specious, and hence, the writ should not have issued at all x x

x.”119[75]

For such wrongful preliminary attachment, plaintiffs may be held liable for damages.

However, Equitable is entitled only to such damages as its evidence would allow,120[76] for the

wrongfulness of an attachment does not automatically warrant the award of damages. The debtor

still has the burden of proving the nature and extent of the injury that it suffered by reason of the

wrongful attachment.121[77]

The Court has gone over the records and found that Equitable has duly proved its claim for,

and is entitled to recover, actual damages. In order to lift the wrongful attachment of Equitable’s

properties, the bank was compelled to pay the total amount of P30,204.26 in premiums for a

counter-bond.122[78] However, Equitable failed to prove that it sustained damage to its “goodwill

and business credit” in consequence of the alleged wrongful attachment. There was no proof of

Equitable’s contention that respondents’ actions caused it public embarrassment and a bank run.

WHEREFORE, premises considered, the Petition is PARTIALLY GRANTED. The

assailed October 13, 2006 Decision of the Court of Appeals in CA-G.R. CV No. 62425 is

MODIFIED by:

1. REDUCING the award of actual damages to respondents to the rate of 6% per annum

of the value of the three checks from July 1991 to June 1993 or a period of twenty-three months;

2. REDUCING the award of moral damages in favor of Augusto L. Pardo from

P3,000,000.00 to P 50,000.00; and

118119120121122

3. REVERSING the dismissal of Equitable Banking Corporation’s cross-claim against

Jose Isidoro Uy, alias Jolly Uy. Jolly Uy is hereby ORDERED to REIMBURSE Equitable

Banking Corporation the amounts that the latter will pay to respondents.

Additionally, the Court hereby REVERSES the dismissal of Equitable Banking

Corporation’s counterclaim for damages against Special Steel Products, Inc. This Court ORDERS

Special Steel Products, Inc. to PAY Equitable Banking Corporation actual damages in the total

amount of P30,204.36, for the wrongful preliminary attachment of its properties.

The rest of the assailed Decision is AFFIRMED.

 

SO ORDERED.

Republic of the PhilippinesSupreme Court

Manila

 

SECOND DIVISION

 

 

RIZAL COMMERCIAL BANKING CORPORATION,

Petitioner,

G.R. No. 192413

Present:

– versus –

HI-TRI DEVELOPMENT

CARPIO, J., Chairperson,

BRION,

PEREZ,

SERENO, and

REYES, JJ.

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

SERENO, J.:

Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal Commercial Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation (Hi-Tri) and Luz R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November 2009 Decision and 27 May 2010 Resolution of the Court of Appeals (CA),123

[1] which reversed and set aside the 19 May 2008 Decision and 3 November 2008 Order of the Makati City Regional Trial Court (RTC) in Civil Case No. 06-244.124[2] The case before the RTC involved the Complaint for Escheat filed by the Republic of the Philippines (Republic) pursuant to Act No. 3936, as amended by Presidential Decree No. 679 (P.D. 679), against certain deposits, credits, and unclaimed balances held by the branches of various banks in the Philippines. The trial court declared the amounts, subject of the special proceedings, escheated to the Republic and ordered them deposited with the Treasurer of the Philippines (Treasurer) and credited in favor of the Republic.125[3] The assailed RTC judgments included an unclaimed balance in the amount of ₱1,019,514.29, maintained by RCBC in its Ermita Business Center branch.

We quote the narration of facts of the CA126[4] as follows:

x x x Luz [R.] Bakunawa and her husband Manuel, now deceased (“Spouses Bakunawa”) are registered owners of six (6) parcels of land covered by TCT Nos. 324985 and 324986 of the Quezon City Register of Deeds, and

123124125126

TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. These lots were sequestered by the Presidential Commission on Good Government [(PCGG)].

Sometime in 1990, a certain Teresita Millan (“Millan”), through her representative, Jerry Montemayor, offered to buy said lots for “₱6,724,085.71”, with the promise that she will take care of clearing whatever preliminary obstacles there may[]be to effect a “completion of the sale”. The Spouses Bakunawa gave to Millan the Owner’s Copies of said TCTs and in turn, Millan made a down[]payment of “₱1,019,514.29” for the intended purchase. However, for one reason or another, Millan was not able to clear said obstacles. As a result, the Spouses Bakunawa rescinded the sale and offered to return to Millan her down[]payment of ₱1,019,514.29. However, Millan refused to accept back the ₱1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, through their company, the Hi-Tri Development Corporation (“Hi-Tri”) took out on October 28, 1991, a Manager’s Check from RCBC-Ermita in the amount of ₱1,019,514.29, payable to Millan’s company Rosmil Realty and Development Corporation (“Rosmil”) c/o Teresita Millan and used this as one of their basis for a complaint against Millan and Montemayor which they filed with the Regional Trial Court of Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991], praying that:

1.      That the defendants Teresita Mil[l]an and Jerry Montemayor may be ordered to return to plaintiffs spouses the Owners’ Copies of Transfer Certificates of Title Nos. 324985, 324986, 103724, 98827, 98828 and 98829;

2.      That the defendant Teresita Mil[l]an be correspondingly ordered to receive the amount of One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine Centavos (₱1,019,514.29);

3.      That the defendants be ordered to pay to plaintiffs spouses moral damages in the amount of ₱2,000,000.00; and

4.      That the defendants be ordered to pay plaintiffs attorney’s fees in the amount of ₱50,000.00.

Being part and parcel of said complaint, and consistent with their prayer in Civil Case No. Q-91-10719 that “Teresita Mil[l]an be correspondingly ordered to receive the amount of One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine [Centavos] (“₱1,019,514.29”)[”], the Spouses Bakunawa, upon advice of their counsel, retained custody of RCBC Manager’s Check No. ER 034469 and refrained from canceling or negotiating it.

All throughout the proceedings in Civil Case No. Q-91-10719, especially during negotiations for a possible settlement of the case, Millan was informed that the Manager’s Check was available for her withdrawal, she being the payee.

On January 31, 2003, during the pendency of the abovementioned case and without the knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBC reported the “₱1,019,514.29-credit existing in favor of Rosmil” to the Bureau of Treasury as among its “unclaimed balances” as of January 31, 2003. Allegedly, a copy of the Sworn Statement executed by Florentino N. Mendoza, Manager and Head of RCBC’s Asset Management, Disbursement & Sundry Department (“AMDSD”) was posted within the premises of RCBC-Ermita.

On December 14, 2006, x x x Republic, through the [Office of the Solicitor General (OSG)], filed with the RTC the action below for Escheat [(Civil Case No. 06-244)].

On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and Millan. Instead of only the amount of “₱1,019,514.29”, [Spouses Bakunawa] agreed to pay Rosmil and Millan the amount of “₱3,000,000.00”, [which is] inclusive [of] the amount of [“]₱1,019,514.29”. But during negotiations and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri] inquired from RCBC-Ermita the availability of the ₱1,019,514.29 under RCBC Manager’s Check No. ER 034469. [Hi-Tri and Spouses Bakunawa] were however dismayed when they were informed that the amount was already subject of the escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz:

“We understand that the deposit corresponding to the amount of Php 1,019,514.29 stated in the Manager’s Check is currently the subject of escheat proceedings pending before Branch 150 of the Makati Regional Trial Court.

Please note that it was our impression that the deposit would be taken from [Hi-Tri’s] RCBC bank account once an order to debit is issued upon the payee’s presentation of the Manager’s Check. Since the payee rejected the negotiated Manager’s Check, presentation of the Manager’s Check was never made.

Consequently, the deposit that was supposed to be allocated for the payment of the Manager’s Check was supposed to remain part of the Corporation[’s] RCBC bank account, which, thereafter, continued to be actively maintained and operated. For this reason, We hereby demand your confirmation that the amount of Php 1,019,514.29 continues to form part of the funds in the Corporation’s RCBC bank account, since pay-out of said amount was never ordered. We wish to point out that if there was any attempt on the part of RCBC to consider the amount indicated in the Manager’s Check separate from the Corporation’s bank account, RCBC would have issued a statement to that effect, and repeatedly reminded the Corporation that the deposit would be considered dormant absent any fund movement. Since the

Corporation never received any statements of account from RCBC to that effect, and more importantly, never received any single letter from RCBC noting the absence of fund movement and advising the Corporation that the deposit would be treated as dormant.”

On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC reiterating their position as above-quoted.

In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri and Spouses Bakunawa] that:

“The Bank’s Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of Manager’s Check No. ER034469 in the escheat proceedings docketed as Civil Case No. 06-244, as well as the status thereof, between 28 January 2008 and 1 February 2008.

xxx xxx xxx

Contrary to what Hi-Tri hopes for, the funds covered by the Manager’s Check No. ER034469 does not form part of the Bank’s own account. By simple operation of law, the funds covered by the manager’s check in issue became a deposit/credit susceptible for inclusion in the escheat case initiated by the OSG and/or Bureau of Treasury.

xxx xxx xxx

Granting arguendo that the Bank was duty-bound to make good the check, the Bank’s obligation to do so prescribed as early as October 2001.”

(Emphases, citations, and annotations were omitted.)

The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial court rendered its assailed Decision declaring the deposits, credits, and unclaimed balances subject of Civil Case No. 06-244 escheated to the Republic. Among those included in the order of forfeiture was the amount of ₱1,019,514.29 held by RCBC as allocated funds intended for the payment of the Manager’s Check issued in favor of Rosmil. The trial court ordered the deposit of the escheated balances with the Treasurer and credited in favor of the Republic. Respondents claim that they were not able to participate in the trial, as they were not informed of the ongoing escheat proceedings.

Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the partial reconsideration of the RTC Decision insofar as it escheated the fund allocated for the

payment of the Manager’s Check. They asked that they be included as party-defendants or, in the alternative, allowed to intervene in the case and their motion considered as an answer-in-intervention. Respondents argued that they had meritorious grounds to ask reconsideration of the Decision or, alternatively, to seek intervention in the case. They alleged that the deposit was subject of an ongoing dispute (Civil Case No. Q-91-10719) between them and Rosmil since 1991, and that they were interested parties to that case.127[5]

On 3 November 2008, the RTC issued an Order denying the motion of respondents. The trial court explained that the Republic had proven compliance with the requirements of publication and notice, which served as notice to all those who may be affected and prejudiced by the Complaint for Escheat. The RTC also found that the motion failed to point out the findings and conclusions that were not supported by the law or the evidence presented, as required by Rule 37 of the Rules of Court. Finally, it ruled that the alternative prayer to intervene was filed out of time.

The CA Ruling

On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008 Decision and 3 November 2008 Order of the RTC. According to the appellate court,128[6] RCBC failed to prove that the latter had communicated with the purchaser of the Manager’s Check (Hi-Tri and/or Spouses Bakunawa) or the designated payee (Rosmil) immediately before the bank filed its Sworn Statement on the dormant accounts held therein. The CA ruled that the bank’s failure to notify respondents deprived them of an opportunity to intervene in the escheat proceedings and to present evidence to substantiate their claim, in violation of their right to due process. Furthermore, the CA pronounced that the Makati City RTC Clerk of Court failed to issue individual notices directed to all persons claiming interest in the unclaimed balances, as well as to require them to appear after publication and show cause why the unclaimed balances should not be deposited with the Treasurer of the Philippines. It explained that the jurisdictional requirement of individual notice by personal service was distinct from the requirement of notice by publication. Consequently, the CA held that the Decision and Order of the RTC were void for want of jurisdiction.

Issue

After a perusal of the arguments presented by the parties, we cull the main issues as follows:

I.                   Whether the Decision and Order of the RTC were void for failure to send separate notices to respondents by personal service

II.                Whether petitioner had the obligation to notify respondents immediately before it filed its Sworn Statement with the Treasurer

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III.             Whether or not the allocated funds may be escheated in favor of the Republic

Discussion

Petitioner bank assails129[7] the CA judgments insofar as they ruled that notice by personal service upon respondents is a jurisdictional requirement in escheat proceedings. Petitioner contends that respondents were not the owners of the unclaimed balances and were thus not entitled to notice from the RTC Clerk of Court. It hinges its claim on the theory that the funds represented by the Manager’s Check were deemed transferred to the credit of the payee or holder upon its issuance.

We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of processes, to wit:

Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he shall commence an action or actions in the name of the People of the Republic of the Philippines in the Court of First Instance of the province or city where the bank, building and loan association or trust corporation is located, in which shall be joined as parties the bank, building and loan association or trust corporation and all such creditors or depositors. All or any of such creditors or depositors or banks, building and loan association or trust corporations may be included in one action. Service of process in such action or actions shall be made by delivery of a copy of the complaint and summons to the president, cashier, or managing officer of each defendant bank, building and loan association or trust corporation and by publication of a copy of such summons in a newspaper of general circulation, either in English, in Filipino, or in a local dialect, published in the locality where the bank, building and loan association or trust corporation is situated, if there be any, and in case there is none, in the City of Manila, at such time as the court may order. Upon the trial, the court must hear all parties who have appeared therein, and if it be determined that such unclaimed balances in any defendant bank, building and loan association or trust corporation are unclaimed as hereinbefore stated, then the court shall render judgment in favor of the Government of the Republic of the Philippines, declaring that said unclaimed balances have escheated to the Government of the Republic of the Philippines and commanding said bank, building and loan association or trust corporation to forthwith deposit the same with the Treasurer of the Philippines to credit of the Government of the Republic of the Philippines to be used as the National Assembly may direct.

At the time of issuing summons in the action above provided for, the clerk of court shall also issue a notice signed by him, giving the title and number of

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said action, and referring to the complaint therein, and directed to all persons, other than those named as defendants therein, claiming any interest in any unclaimed balance mentioned in said complaint, and requiring them to appear within sixty days after the publication or first publication, if there are several, of such summons, and show cause, if they have any, why the unclaimed balances involved in said action should not be deposited with the Treasurer of the Philippines as in this Act provided and notifying them that if they do not appear and show cause, the Government of the Republic of the Philippines will apply to the court for the relief demanded in the complaint. A copy of said notice shall be attached to, and published with the copy of, said summons required to be published as above, and at the end of the copy of such notice so published, there shall be a statement of the date of publication, or first publication, if there are several, of said summons and notice. Any person interested may appear in said action and become a party thereto. Upon the publication or the completion of the publication, if there are several, of the summons and notice, and the service of the summons on the defendant banks, building and loan associations or trust corporations, the court shall have full and complete jurisdiction in the Republic of the Philippines over the said unclaimed balances and over the persons having or claiming any interest in the said unclaimed balances, or any of them, and shall have full and complete jurisdiction to hear and determine the issues herein, and render the appropriate judgment thereon. (Emphasis supplied.)

Hence, insofar as banks are concerned, service of processes is made by delivery of a copy of the complaint and summons upon the president, cashier, or managing officer of the defendant bank.130[8] On the other hand, as to depositors or other claimants of the unclaimed balances, service is made by publication of a copy of the summons in a newspaper of general circulation in the locality where the institution is situated.131[9] A notice about the forthcoming escheat proceedings must also be issued and published, directing and requiring all persons who may claim any interest in the unclaimed balances to appear before the court and show cause why the dormant accounts should not be deposited with the Treasurer.

Accordingly, the CA committed reversible error when it ruled that the issuance of individual notices upon respondents was a jurisdictional requirement, and that failure to effect personal service on them rendered the Decision and the Order of the RTC void for want of jurisdiction. Escheat proceedings are actions in rem,132[10] whereby an action is brought against the thing itself instead of the person.133[11] Thus, an action may be instituted and carried to judgment without personal service upon the depositors or other claimants.134

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[12] Jurisdiction is secured by the power of the court over the res.135[13] Consequently, a judgment of escheat is conclusive upon persons notified by advertisement, as publication is considered a general and constructive notice to all persons interested.136[14]

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds allocated for the payment of the Manager’s Check in the escheat proceedings.

Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty, steps in and claims abandoned, left vacant, or unclaimed property, without there being an interested person having a legal claim thereto.137[15] In the case of dormant accounts, the state inquires into the status, custody, and ownership of the unclaimed balance to determine whether the inactivity was brought about by the fact of death or absence of or abandonment by the depositor.138[16] If after the proceedings the property remains without a lawful owner interested to claim it, the property shall be reverted to the state “to forestall an open invitation to self-service by the first comers.”139[17] However, if interested parties have come forward and lain claim to the property, the courts shall determine whether the credit or deposit should pass to the claimants or be forfeited in favor of the state.140[18] We emphasize that escheat is not a proceeding to penalize depositors for failing to deposit to or withdraw from their accounts. It is a proceeding whereby the state compels the surrender to it of unclaimed deposit balances when there is substantial ground for a belief that they have been abandoned, forgotten, or without an owner.141[19]

Act No. 3936, as amended, outlines the proper procedure to be followed by banks and other similar institutions in filing a sworn statement with the Treasurer concerning dormant accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month of January of every odd year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer of the Philippines a statement, under oath, of their respective managing officers, of all credits and deposits held by them in favor of persons known to be dead, or who have not made further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical order according to the names of creditors and depositors, and showing:

(a)     The names and last known place of residence or post office addresses of the persons in whose favor such unclaimed balances stand; 

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(b)     The amount and the date of the outstanding unclaimed balance and whether the same is in money or in security, and if the latter, the nature of the same;

 (c)     The date when the person in whose favor the unclaimed balance stands

died, if known, or the date when he made his last deposit or withdrawal; and 

(d)    The interest due on such unclaimed balance, if any, and the amount thereof.

A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the bank, building and loan association, or trust corporation concerned for at least sixty days from the date of filing thereof: Provided, That immediately before filing the above sworn statement , the bank , building and loan association, and trust corporation shall communicate with the person in whose favor the unclaimed balance stands at his last known place of residence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to time the existence of unclaimed balances held by banks, building and loan associations, and trust corporations. (Emphasis supplied.)

As seen in the afore-quoted provision, the law sets a detailed system for notifying depositors of unclaimed balances. This notification is meant to inform them that their deposit could be escheated if left unclaimed. Accordingly, before filing a sworn statement, banks and other similar institutions are under obligation to communicate with owners of dormant accounts. The purpose of this initial notice is for a bank to determine whether an inactive account has indeed been unclaimed, abandoned, forgotten, or left without an owner. If the depositor simply does not wish to touch the funds in the meantime, but still asserts ownership and dominion over the dormant account, then the bank is no longer obligated to include the account in its sworn statement.142[20] It is not the intent of the law to force depositors into unnecessary litigation and defense of their rights, as the state is only interested in escheating balances that have been abandoned and left without an owner.

In case the bank complies with the provisions of the law and the unclaimed balances are eventually escheated to the Republic, the bank “shall not thereafter be liable to any person for the same and any action which may be brought by any person against in any bank xxx for unclaimed balances so deposited xxx shall be defended by the Solicitor General without cost to such bank.”143[21] Otherwise, should it fail to comply with the legally outlined procedure to the prejudice of the depositor, the bank may not raise the defense provided under Section 5 of Act No. 3936, as amended.

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Petitioner asserts144[22] that the CA committed a reversible error when it required RCBC to send prior notices to respondents about the forthcoming escheat proceedings involving the funds allocated for the payment of the Manager’s Check. It explains that, pursuant to the law, only those “whose favor such unclaimed balances stand” are entitled to receive notices. Petitioner argues that, since the funds represented by the Manager’s Check were deemed transferred to the credit of the payee upon issuance of the check, the proper party entitled to the notices was the payee – Rosmil – and not respondents. Petitioner then contends that, in any event, it is not liable for failing to send a separate notice to the payee, because it did not have the address of Rosmil. Petitioner avers that it was not under any obligation to record the address of the payee of a Manager’s Check.

In contrast, respondents Hi-Tri and Bakunawa allege145[23] that they have a legal interest in the fund allocated for the payment of the Manager’s Check. They reason that, since the funds were part of the Compromise Agreement between respondents and Rosmil in a separate civil case, the approval and eventual execution of the agreement effectively reverted the fund to the credit of respondents. Respondents further posit that their ownership of the funds was evidenced by their continued custody of the Manager’s Check.

An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank (drawee),146[24] requesting the latter to pay a person named therein (payee) or to the order of the payee or to the bearer, a named sum of money.147[25] The issuance of the check does not of itself operate as an assignment of any part of the funds in the bank to the credit of the drawer.148[26] Here, the bank becomes liable only after it accepts or certifies the check.149

[27] After the check is accepted for payment, the bank would then debit the amount to be paid to the holder of the check from the account of the depositor-drawer.

There are checks of a special type called manager’s or cashier’s checks. These are bills of exchange drawn by the bank’s manager or cashier, in the name of the bank, against the bank itself.150[28] Typically, a manager’s or a cashier’s check is procured from the bank by allocating a particular amount of funds to be debited from the depositor’s account or by directly paying or depositing to the bank the value of the check to be drawn. Since the bank issues the check in its name, with itself as the drawee, the check is deemed accepted in advance.151[29] Ordinarily, the check becomes the primary obligation of the issuing bank and constitutes its written promise to pay upon demand.152[30]

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Nevertheless, the mere issuance of a manager’s check does not ipso facto work as an automatic transfer of funds to the account of the payee. In case the procurer of the manager’s or cashier’s check retains custody of the instrument, does not tender it to the intended payee, or fails to make an effective delivery, we find the following provision on undelivered instruments under the Negotiable Instruments Law applicable:153[31]

Sec. 16. Delivery; when effectual; when presumed. – Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. (Emphasis supplied.)

Petitioner acknowledges that the Manager’s Check was procured by respondents, and that the amount to be paid for the check would be sourced from the deposit account of Hi-Tri.154[32] When Rosmil did not accept the Manager’s Check offered by respondents, the latter retained custody of the instrument instead of cancelling it. As the Manager’s Check neither went to the hands of Rosmil nor was it further negotiated to other persons, the instrument remained undelivered. Petitioner does not dispute the fact that respondents retained custody of the instrument.155[33]

Since there was no delivery, presentment of the check to the bank for payment did not occur. An order to debit the account of respondents was never made. In fact, petitioner confirms that the Manager’s Check was never negotiated or presented for payment to its Ermita Branch, and that the allocated fund is still held by the bank.156[34] As a result, the assigned fund is deemed to remain part of the account of Hi-Tri, which procured the Manager’s Check. The doctrine that the deposit represented by a manager’s check automatically passes to the payee is inapplicable, because the instrument – although accepted in advance – remains undelivered. Hence, respondents should have been informed that the deposit had been left inactive for more than 10 years, and that it may be subjected to escheat proceedings if left unclaimed.

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After a careful review of the RTC records, we find that it is no longer necessary to remand the case for hearing to determine whether the claim of respondents was valid. There was no contention that they were the procurers of the Manager’s Check. It is undisputed that there was no effective delivery of the check, rendering the instrument incomplete. In addition, we have already settled that respondents retained ownership of the funds. As it is obvious from their foregoing actions that they have not abandoned their claim over the fund, we rule that the allocated deposit, subject of the Manager’s Check, should be excluded from the escheat proceedings. We reiterate our pronouncement that the objective of escheat proceedings is state forfeiture of unclaimed balances. We further note that there is nothing in the records that would show that the OSG appealed the assailed CA judgments. We take this failure to appeal as an indication of disinterest in pursuing the escheat proceedings in favor of the Republic.

WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May 2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.

SO ORDERED.