G.R. No.

129471             April 28, 2000 It appears that private respondent had also applied for a loan from petitioner in 1978, offering
his 19.4 hectare property under Tax Declaration No. D-2247 as security for the loan. As part of
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,  the processing of the application, a representative of petitioner, Patton R. Olano, inspected the
vs. land and appraised its value.
COURT OF APPEALS and CARLOS CAJES, respondents.
Private respondent's loan application was later approved by petitioner. 19 However after
releasing the amount of the loan to private respondent, petitioner found that the land
mortgaged by private respondent was included in the land covered by TCT No. 10101 in the
name of the spouses Beduya. Petitioner, therefore, cancelled the loan and demanded
immediate payment of the amount. 20 Private respondent paid the loan to petitioner for which
MENDOZA, J.: the former was issued a Cancellation of Mortgage, dated March 18, 1981, releasing the
property in question from encumbrance. 21
This is a petition for certiorari seeking to reverse the decision1 and resolution2 of the Court of
Appeals dated August 30, 1996 and April 23, 1997, respectively, declaring private respondent Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the
Carlos Cajes the owner of 19.4 hectares of land embraced in TCT No. 10101 and ordering the property covered by TCT No. 10101 was conducted by petitioner's representatives. It was
segregation and reconveyance of said portion to him. then discovered that private respondent was occupying a portion of said land. Private
respondent was informed that petitioner had become the owner of the land he was occupying,
The antecedent facts are as follows: and he was asked to vacate the property. As private respondent refused to do so, 22 petitioner
filed a complaint for recovery of possession with damages against him. The case was
The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was assigned to Branch 1 of the Regional Trial Court, Tagbilaran City, 23 which after trial, rendered
originally owned by Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax a decision, dated August 22, 1989, declaring petitioner the lawful owner of the entire land
Declaration No. 3840.3 In 1950,4 Mumar sold the land to private respondent who was issued covered by TCT No. 10101 on the ground that the decree of registration was binding upon the
Tax Declaration No. R-1475 that same year.5 The tax declaration was later superseded by Tax land. 24 The dispositive portion of the decision reads:
Declaration Nos. R-799 issued in 19616 and D-2247 issued in 1974.7 Private respondent
occupied and cultivated the said land,8 planting cassava and camote in certain portions of the WHEREFORE, foregoing considered, the court renders judgment:
land.9
1 Declaring plaintiff bank Development Bank of the Philippines the true and legal
In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration owner of the land in question covered by TCT No. 10101 farm of Gaudencio Beduya;
of a parcel of land with an area of 1,512,468.00 square meters, 10 in his name for which he
was issued OCT No. 546 on June 16, 1969. 11 The parcel of land included the 19.4 hectares 2 Dismissing defendant's counterclaim;
occupied by private respondent. Alvarez never occupied nor introduced improvements on said
land. 12
3 Ordering defendant to vacate from the land in question; the portion of which he
claims to belong to him for without basis in fact and law;
In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT
No. 10101 was issued. 13 That same year, the spouses Beduya obtained a loan from petitioner
Development Bank of the Philippines for P526,000.00 and, as security, mortgaged the land 4 Ordering defendant, his agents or any person representing him or those who may
covered by TCT No. 10101 to the bank. 14 In 1978, the SAAD Investment Corp., and the SAAD claim substantial rights on the land to vacate therefrom, cease and desist from
Agro-Industries, Inc., represented by Gaudencio Beduya, and the spouses Beduya personally disturbing, molesting and interfering plaintiff's possession of the land in question, and
executed another mortgage over the land in favor of petitioner to secure a loan of from committing any such act as would tend to mitigate, deny or deprive plaintiff of its
P1,430,000.00. 15 ownership and possession over said land.

The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the SO ORDERED.
property was foreclosed. 16 In the resulting foreclosure sale held on January 31, 1985,
petitioner was the highest bidder. 17 As the spouses Beduya failed to redeem the property, On appeal, the Court of Appeals reversed and gave judgment for private respondent,
petitioner consolidated its ownership. 18 declaring him the owner of the 19.4 hectares of land erroneously included in TCT No. 10101.
The dispositive portion of the appellate court's decision reads:
 WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new already covered by the tax declarations in the name of J. M. Tuason & Co., Inc. In 1914, OCT
decision is hereby rendered: No. 735 was issued in the name of Tuason so that, from that time on, no possession could
defeat the title of the registered owners of the land. Thirdly, the validity of OCT No. 735 had
1. Dismissing the complaint. already been recognized by this Court in several cases 29 and, as a result thereof, the transfer
certificates of title acquired by the innocent purchasers for value were also declared valid. It
was held that neither could the claimants file an action to annul these titles for not only had
2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101
these actions prescribed, but the fact was that the claimants were also barred from doing so
as exclusively belonging to defendant-appellant, ordering its segregation from
by laches, having filed the complaint only in 1955, or 41 years after the issuance of OCT No.
plaintiff-appellee's title and its reconveyance to appellant.
735 to J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registration which was
considered in resolving the Benin case. What was considered decisive was the valid title or
No pronouncement as to costs. right of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for
value and in good faith compared to the failure of the claimants to show their right to own or
SO ORDERED. 25 possess the questioned properties.1âwphi1.nêt

Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, Petitioner maintains that the possession by private respondent and his predecessor-in-interest
1997. 26 Hence this petition. of the 19.4 hectares of land for more than 30 years cannot overcome the decree of registration
issued in favor of its predecessor-in-interest Jose Alvarez. Petitioner quotes the following
Petitioner contends that: statement in the Benin case:

I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE It follows also that the allegation of prescriptive title in favor of plaintiffs does not
APPLICABLE PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND THE suffice to establish a cause of action. If such prescription was completed before the
APPLICABLE DECISIONS OF THE SUPREME COURT, PARTICULARLY IN THE registration of the land in favor of the Tuasons, the resulting prescriptive title was cut
CASE OF BENIN VS. TUASON, 57 SCRA 531. off and extinguished by the decree of registration. If, on the contrary, the prescription
was either begun or completed after the decree of registration, it conferred no title
II. THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP because, by express provision of law, prescription can not operate against the
BEING AN INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN QUESTION registered owner (Act 496). 30
AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION
SALE. Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those
claiming title from him (i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of
III. THE RESPONDENT COURT'S RULING DECLARING DBP IN ESTOPPEL IS land, despite the fact that they neither possessed nor occupied these lands.
ILLOGICAL. 27
This view is mistaken. A consideration of the cases shows that a decree of registration cut off
28 
First. Petitioner invokes the ruling of this Court in Benin v.  Tuason  in support of its claim that or extinguished a right acquired by a person when such right refers to a lien or encumbrance
its predecessor-in-interest, Jose Alvarez, became the owner of the land by virtue of the decree on the land — not to the right of ownership thereof — which was not annotated on the
of registration issued in his name. In Benin, three sets of plaintiffs filed separate complaints certificate of title issued thereon. Thus, Act No. 496 provides:
against Mariano Severo Tuason and J.M. Tuason & Co., Inc., praying for the cancellation of
OCT No. 735 covering two parcels of land called the Sta. Mesa Estate, or Parcel 1, with an Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
area of 8,798,617.00 square meters, and the Diliman Estate, or Parcel 2, with an area of registration, and every subsequent purchaser of registered land who takes a
15,961,246.00 square meters. They asked that they be declared the owners and lawful certificate of title for value in good faith shall hold the same  free of all
possessors of said lands. encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:
Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands
which had already been subdivided and bought by innocent purchasers for value and in good First. Liens, claims, or rights arising or existing under the laws of Constitution of the
faith at the time the claimants obtained registration. Secondly, when the claimants' ancestors United States or of the Philippine Islands which the statutes of the Philippine Islands
occupied the lands in question and declared them for tax purposes in 1944, the lands were cannot require to appear of record in the Registry.
 Second. Taxes within two years after the same became due and payable. . . . The purpose of the Land Registration Act, as this court has had occasion to so
state more than once, is not to create or vest title, but to confirm and register title
Third. Any public highway, way, private way established by law, or any Government already created and already vested, and of course, said original certificate of title No.
irrigation canal or lateral thereof, where the certificate of title does not state that the 8995 could not have vested in the defendant more title than what was rightfully due
boundaries of such highway, way, or irrigation canal or lateral thereof, have been her and her coowners. It appearing that said certificate granted her much more than
determined. she expected, naturally to the prejudice of another, it is but just that the error, which
gave rise to said anomaly, be corrected (City of Manila vs. Lack, 19 Phil., 324). The
defendant and her coowners knew or, at least, came to know that it was through error
But if there are easements or other rights appurtenant to a parcel of registered land
that the original certificate of title in question was issued by the court which heard
which for any reason have failed to be registered, such easements or rights shall
cadastral case No. 11 of Bacolor, not only in or prior to March, 1933, but from the time
remain so appurtenant notwithstanding such failure, and shall be held to pass with the
said certificate was issued in their favor, that is, from December 15, 1921. This is
land until cut off or extinguished by the registration of the servient estate, or in any
evidenced by the fact that, ever since, they remained passive without even attempting
other manner.
to make the least showing of ownership over the land in question until after the lapse
of more than eleven years. The Land Registration Act as well as the Cadastral Act
Hence, in Cid v. Javier, 31 it was held: protects only the holders of a title in good faith and does not permit its provisions to be
used as a shield for the commission of fraud, or that one should enrich himself at the
. . . Consequently, even conceding arguendo that such an easement has been expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands,
acquired, it had been cut off and extinguished by the registration of the servient estate 49 Phil., 838). The above-stated Acts do not give anybody, who resorts to the
under the Torrens system without the easement being annotated on the provisions thereof, a better title than he really and lawfully has. If he happened to
corresponding certificate of title, pursuant to Section 39 of the Land Registration Act. obtain it by mistake or to secure, to the prejudice of his neighbor, more land than he
really owns, with or without bad faith on his part, the certificate of title, which may
This principle was reiterated in Purugganan v. Paredes  32 which also involved an easement of have been issued to him under the circumstances, may and should be cancelled or
light and view that was not annotated on the certificate of title of the servient estate. corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section
112 of Act No. 496, which is applicable to the Cadastral Act because it is so provided
But to make this principle applicable to a situation wherein title acquired by a person through expressly by the provisions of section 11 of the latter Act. It cannot be otherwise
acquisitive prescription would be considered cut off and extinguished by a decree of because, as stated in the case of Domingo vs.Santos, Ongsiako, Lim y Cia. (55 Phil.,
registration would run counter to established jurisprudence before and after the ruling in 361), errors in the plans of lands sought to be registered in the registry and
Benin. Indeed, registration has never been a mode of acquiring ownership over immovable reproduced in the certificate of title issued later, do not annul the decree of registration
property. As early as 1911, in the case of City of Manila v.  Lack, 33 the Court already ruled on on the ground that it is not the plan but the land itself which is registered in the
the purpose of registration of lands, viz.: registry. In other words, if the plan of an applicant for registration or claimant in a
cadastral case alleges that the land referred to in said plan is 100 or 1,000 hectares,
and the land which he really owns and desires to register in the registry is only 80
The Court of Land Registration was created for a single purpose. The Act is entitled
ares, he cannot claim to be the owner of the existing difference if afterwards he is
"An Act to provide for the adjudication and registration of titles to lands in the
issued a certificate of title granting him said area of 100 or 1,000 hectares. 35
Philippine Islands." The sole purpose of the Legislature in its creation was to bring the
land titles of the Philippine Islands under one comprehensive and harmonious system,
the cardinal features of which are indefeasibility of title and the intervention of the The principle laid down in this 1938 case remains the prevailing doctrine, its latest application
State as a prerequisite to the creation and transfer of titles and interest, with the being in the case of Reyes v. Court of Appeals  36 wherein we ruled that the fact that a party
resultant increase in the use of land as a business asset by reason of the greater was able to secure a title in his favor did not operate to vest ownership upon her of the
certainty and security of title. It does not create a title nor vest one. It simply confirms property.
a title already created and already vested, rendering it forever indefeasible. . .
In the present case, private respondent has been in actual, open, peaceful and continuous
34 
Again, in the case of Angeles v.  Samia  where land was erroneously registered in favor of possession of the property since 1950. This fact was corroborated by the testimony of
persons who neither possessed nor occupied the same, to the prejudice of the actual Eleuterio Cambangay who personally knew that Ulpiano Mumar transferred the land covered
occupant, the Court held: by Tax Declaration No. 3840 37 in favor of private respondent in 1950. 38Private respondent's
claim based on actual occupation of the land is bolstered by Tax Declaration Nos. R-1475, R-
799 and D-2247 39 which were issued in his name in 1950, 1961 and 1974, respectively.
Together with his actual possession of the land, these tax declarations constitute strong The true owner may bring an action to have the ownership or title to the land judicially
evidence of ownership of the land occupied by him. As we said in the case of Republic settled and the Court in the exercise of its equity jurisdiction, without ordering the
vs.  Court of Appeals: 40 cancellation of the Torrens title issued upon the patent, may direct the defendants, the
registered owner to reconvey the parcel of land to the plaintiff who has been found to
Although tax declarations or realty tax payments of property are not conclusive be the true owner thereof." (Vital vs. Amore, 90 Phil. 955) "The reconveyance is just
evidence of ownership, nevertheless, they are good indicia of possession in the and proper in order to terminate the intolerable anomaly that the patentees should
concept of owner for no one in his right mind would be paying taxes for a property that have a torrens title for the land which they and their predecessors never possessed
is not in his actual or at least constructive possession. They constitute at least proof which has been possessed by Novo in the concept of owner." (Bustarga v. Novo, 129
that the holder has a claim of title over the property. The voluntary declaration of a SCRA 125). 45
piece of property for taxation purposes manifests not only one's sincere and honest
desire to obtain title to the property and announces his adverse claim against the Second. Generally, an action for reconveyance based on an implied or constructive trust, such
State and all other interested parties, but also the intention to contribute needed as the instant case, prescribes in 10 years from the date of issuance of decree of
revenues to the Government. Such an act strengthens one's bona fide claim of registration. 46 However, this rule does not apply when the plaintiff is in actual possession of
acquisition of ownership. the land. Thus, it has been held:

More importantly, it was established that private respondent, having been in possession of the . . . [A]n action for reconveyance of a parcel of land based on implied or constructive
land since 1950, was the owner of the property when it was registered by Jose Alvarez in trust prescribes in ten years, the point of reference being the date of registration of the
1969, his possession tacked to that of his predecessor-in-interest, Ulpiano Mumar, which deed or the date of the issuance of the certificate of title over the property, but this rule
dates back to 1917. 41 Clearly, more than 30 years had elapsed before a decree of registration applies only when the plaintiff or the person enforcing the trust is not in possession of
was issued in favor of Jose Alvarez. This uninterrupted adverse possession of the land for the property, since if a person claiming to be the owner thereof is in actual possession
more than 30 years could only ripen into ownership of the land through acquisitive prescription of the property, as the defendants are in the instant case, the right to seek
which is a mode of acquiring ownership and other real rights over immovable property. reconveyance, which in effect seeks to quiet title to the property, does not prescribe.
Prescription requires public, peaceful, uninterrupted and adverse possession of the property in The reason for this is that one who is in actual possession of a piece of land claiming
the concept of an owner for ten (10) years, in case the possession is in good faith and with a to be the owner thereof may wait until his possession is disturbed or his title is
just title. Such prescription is called ordinary prescription, as distinguished from extraordinary attacked before taking steps to vindicate his right, the reason for the rule being, that
prescription which requires possession for 30 years in case possession is without just title or is his undisturbed possession gives him a continuing right to seek the aid of a court of
not in good faith. 42 equity to ascertain and determine the nature of the adverse claim of a third party and
its effect on his own title, which right can be claimed only by one who is in
In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses possession. 47
Beduya were at any time in possession of the property in question. In fact, despite knowledge
by Gaudencio Beduya that private respondent occupied this 19.4 hectares included in the Having been the sole occupant of the land in question, private respondent may seek
area covered by TCT No. 10101, 43 he never instituted any action to eject or recover reconveyance of his property despite the lapse of more than 10 years.
possession from the latter. Hence, it can be concluded that neither Jose Alvarez nor the
spouses Beduya ever exercised any right of ownership over the land. The fact of registration Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that
in their favor never vested in them the ownership of the land in dispute. "If a person obtains a the indefeasibility of torrens titles cannot be collaterally attacked. In the instant case, the
title under the Torrens system, which includes by mistake or oversight land which can no original complaint is for recovery of possession filed by petitioner against private respondent,
longer be registered under the system, he does not, by virtue of the said certificate alone, not an original action filed by the latter to question the validity of TCT No. 10101 on which
become the owner of the lands illegally included." 44 petitioner bases its right. To rule on the issue of validity in a case for recovery of possession is
tantamount to a collateral attack. However, it should not be overlooked that private respondent
Considering the circumstances pertaining in this case, therefore, we hold that ownership of the filed a counterclaim against petitioner, claiming ownership over the land and seeking
19.4 hectares of land presently occupied by private respondent was already vested in him and damages. Hence, we could rule on the question of the validity of TCT No. 10101 for the
that its inclusion in OCT No. 546 and, subsequently, in TCT No. 10101, was erroneous. counterclaim can be considered a direct attack on the same. "A counterclaim is considered a
Accordingly, the land in question must be reconveyed in favor of private respondent, the true complaint, only this time, it is the original defendant who becomes the plaintiff. . . . It stands on
and actual owner thereof, reconveyance being clearly the proper remedy in this case. the same footing and is to be tested by the same rules as if it were an independent
action." 48 In an analogous case, 49we ruled on the validity of a certificate of title despite the fact
that the original action instituted before the lower court was a case for recovery of possession.
The Court reasoned that since all the facts of the case are before it, to direct the party to the certificate of title. In the absence of anything to excite suspicion, said mortgagee is
institute cancellation proceedings would be needlessly circuitous and would unnecessarily under no obligation to look beyond the certificate and investigate the title of the
delay the termination of the controversy which has already dragged on for 20 years. mortgagor appearing on the face of said certificate. Although Article 2085 of the Civil
Code provides that absolute ownership of the mortgaged property by the mortgagor is
Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, essential, the subsequent declaration of a title as null and void is not a ground for
because it is an innocent purchaser for value in the foreclosure sale held in 1985. nullifying the mortgage right of a mortgagee in good faith.51

This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides: The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To
be sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on the
history of the mortgagor's title. Nonetheless, especially in the case of a banking institution, a
If the court after hearing finds that the applicant or adverse claimant has title as stated
mortgagee must exercise due diligence before entering into said contract. Judicial notice is
in his application or adverse claim and proper for registration, a decree of confirmation
taken of the standard practice for banks, before approving a loan, to send representatives to
and registration shall be entered. Every decree of registration shall bind the land, and
the premises of the land offered as collateral and to investigate who are the real owners
quiet title thereto, subject only to the exceptions stated in the following section. It shall
thereof. Banks, their business being impressed with public interest, are expected to exercise
be conclusive upon and against all persons, including the Insular Government and all
more care and prudence than private individuals in their dealings, even those involving
the branches thereof, whether mentioned by name in the application, notice, or
registered lands. 52
citation, or included in the general description "To all whom it may concern." Such
decree shall not be opened by reason of the absence, infancy, or other disability of
any person affected thereby, nor by any proceeding in any court for reversing In this case, petitioner's representative, Patton R. Olano, admitted that he came to know of the
judgments or decrees; subject, however, to the right of any person deprived of land or property for the first time in 1979 when he inspected it to determine whether the portion
of any estate or interest therein by decree of registration obtained by fraud to file in occupied by private respondent and mortgaged by the latter to petitioner was included in TCT
the competent Court of First Instance a petition for review within one year after entry No. 10101. This means that when the land was mortgaged by the spouses Beduya in 1972,
of the decree, provided no innocent purchaser for value has acquired an interest. no investigation had been made by petitioner. It is clear, therefore, that petitioner failed to
Upon the expiration of said term of one year, every decree or certificate of title issued exercise due care and diligence in establishing the condition of the land as regards its actual
in accordance with this section shall be incontrovertible. If there is any such owners and possessors before it entered into the mortgage contract in 1972 with the Beduyas.
purchaser, the decree of registration shall not be opened, but shall remain in full force Had it done so, it would not have failed to discover that private respondent was occupying the
and effect forever, subject only to the right of appeal hereinbefore disputed portion of 19.4 hectares. For this reason, petitioner cannot be considered an innocent
provided: Provided, however, That no decree or certificate of title issued to persons purchaser for value when it bought the land covered by TCT No. 10101 in 1985 at the
not parties to the appeal shall be cancelled or annulled. But any person aggrieved by foreclosure sale.
such decree in any case may pursue his remedy by action for damages against the
applicant or any other person for fraud in procuring the decree. Whenever the phrase Indeed, two circumstances negate petitioner's claim that it was an innocent purchaser for
"innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be value when it bought the land in question, including the portion occupied by private
deemed to include an innocent lessee, mortgagee, or other encumbrancer for value. respondent: (1) petitioner was already informed by Gaudencio Beduya that private respondent
(As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.) occupied a portion of the property covered by TCT No. 10101; and (2) petitioner's
representative conducted an investigation of the property in 1979 to ascertain whether the
Succinctly put, §38 provides that a certificate of title is conclusive and binding upon the whole land mortgaged by private respondent was included in TCT No. 10101. In other words,
world. Consequently, a buyer need not look behind the certificate of title in order to determine petitioner was already aware that a person other than the registered owner was in actual
who is the actual owner of the land. However, this is subject to the right of a person deprived possession of the land when it bought the same at the foreclosure sale. A person who
of land through fraud to bring an action for reconveyance, provided that it does not prejudice deliberately ignores a significant fact which would create suspicion in an otherwise reasonable
the rights of an innocent purchaser for value and in good faith. "It is a condition sine qua man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot
non for an action for reconveyance to prosper that the property should not have passed to the close his eyes to facts which should put a reasonable man upon his guard, and then claim that
hands of an innocent purchaser for value." 50 The same rule applies to mortgagees, like he acted in good faith under the belief that there was no defect in the title of the vendor." 53
petitioner. Thus, we held:
Petitioner deliberately disregarded both the fact that private respondent already occupied the
Where the certificate of title is in the name of the mortgagor when the land is property and that he was claiming ownership over the same. It cannot feign ignorance of
mortgaged, the innocent mortgagee for value has the right to rely on what appears on private respondent's claim to the land since the latter mortgaged the same land to petitioner as
security for the loan he contracted in 1978 on the strength of the tax declarations issued under
his name. Instead of inquiring into private respondent's occupation over the land, petitioner or through culpable negligence, induces another to believe certain facts to exist and such
simply proceeded with the foreclosure sale, pretending that no doubts surround the ownership other rightfully relies and acts on such belief, so that he will be prejudiced if the former is
of the land covered by TCT No. 10101. Considering these circumstances, petitioner cannot be permitted to deny the existence of such facts." 56 In the case at bar, upon learning that the land
deemed an innocent mortgagee/purchaser for value. As we ruled: occupied by private respondent was also covered by TCT No. 10101, petitioner immediately
demanded full payment of the loan and thereafter cancelled the mortgage contract, a fact that
The failure of appellees to take the ordinary precautions which a prudent man would is admitted by private respondent himself. 57 Indeed, nothing in record indicates that petitioner
have taken under the circumstances, specially in buying a piece of land in the actual, impliedly acquiesced to the validity of private respondent's title when it found out that the latter
visible and public possession of another person, other than the vendor, constitutes was occupying a portion of the land covered by TCT No. 10101.1âwphi1.nêt
gross negligence amounting to bad faith.
However, for reasons aforestated, we uphold private respondent's ownership of 19.4 hectares
In this connection, it has been held that where, as in this case, the land sold is in the occupied by him. As a necessary consequence thereof, such portion of land included in TCT
possession of a person other than the vendor, the purchaser is required to go beyond No. 10101 must be segregated and reconveyed in his favor.
the certificates of title and ma[k]e inquiries concerning the rights of the actual
possessor. (Citations omitted.) WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.

x x x           x x x          x x x SO ORDERED.

One who purchases real property which is in the actual possession of another should, G.R. No. 97626 March 14, 1997
at least, make some inquiry concerning the right of those in possession. The actual
possession by other than the vendor should, at least put the purchaser upon inquiry. PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL
He can scarcely, in the absence of such inquiry, be regarded as a bona fide purchaser INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA
as against such possessors. 54 PASCUAL, et al., petitioners, 
vs.
Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO
the outcome of this case. Petitioner claims that the fact that it approved a loan in favor of LIPANA, its President & General Manager, respondents.
private respondent and executed a mortgage contract covering the 19.4 hectares covered by
tax declarations issued under private respondent's name does not mean that it is estopped
from questioning the latter's title. Petitioner accuses private respondent of having made
misrepresentations which led it to believe in his valid title and ownership. HERMOSISIMA, JR., J.:

The claim has no basis. Private respondent made no misrepresentation with regard to the land Challenged in this petition for review is the Decision dated February 28, 19911 rendered by
occupied by him as he is actually the real owner thereof. Moreover, when private respondent public respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of
entered into a mortgage contract with petitioner, his claim of ownership was supported not the Regional Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in
only by the tax declarations but also by a certification of the Clerk of Court of the Court of First Civil Case No. 27288 entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of
Instance of Bohol that no civil, land registration or cadastral case has been filed or instituted Commerce, now absorbed by Philippine Commercial and Industrial Bank."
before the court affecting the validity of Tax Declaration No. D-2247 covering the land located
in Bugang, San Miguel, Bohol and declared in the name of Carlos Cajes. 55 These documents
were relied upon by private respondent in support of his claim of ownership. We cannot The case stemmed from a complaint filed by the private respondent Rommel's Marketing
consider the submission of these documents as misrepresentations by private respondent as Corporation (RMC for brevity), represented by its President and General Manager Romeo
to the actual ownership of the land. Rather, private respondent believed in good faith and with Lipana, to recover from the former Philippine Bank of Commerce (PBC for brevity), now
good reason that he was the owner of the 19.4 hectares occupied by him. absorbed by the Philippine Commercial International Bank, the sum of P304,979.74
representing various deposits it had made in its current account with said bank but which were
not credited to its account, and were instead deposited to the account of one Bienvenido
As to the question of estoppel, we do not find petitioner to be estopped from questioning Cotas, allegedly due to the gross and inexcusable negligence of the petitioner bank.
private respondent's title.1âwphi1"Estoppel in pais arises when one, by his acts,
representations or admission, or by his own silence when he ought to speak out, intentionally
RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and WHEREFORE, judgment is hereby rendered sentencing defendant Philippine
53-01748-7, with the Pasig Branch of PBC in connection with its business of selling Bank of Commerce, now absorbed by defendant Philippine Commercial &
appliances. Industrial Bank, and defendant Azucena Mabayad to pay the plaintiff, jointly
and severally, and without prejudice to any criminal action which may be
In the ordinary and usual course of banking operations, current account deposits are accepted instituted if found warranted:
by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's
agent or representative, who indicates therein the current account number to which the 1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest
deposit is to be credited, the name of the depositor or current account holder, the date of the thereon at the legal rate from the filing of the complaint;
deposit, and the amount of the deposit either in cash or checks. The deposit slip has an upper
portion or stub, which is detached and given to the depositor or his agent; the lower portion is 2. A sum equivalent to 14% thereof, as exemplary damages;
retained by the bank. In some instances, however, the deposit slips are prepared in duplicate
by the depositor. The original of the deposit slip is retained by the bank, while the duplicate 3. A sum equivalent to 25% of the total amount due, as and for attorney's
copy is returned or given to the depositor. fees; and

From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC 4. Costs.
funds in the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose
of depositing said funds in the current accounts of RMC with PBC. It turned out, however, that
these deposits, on all occasions, were not credited to RMC's account but were instead Defendants' counterclaim is hereby dismissed for lack of merit.2
deposited to Account No. 53-01734-7 of Yabut's husband, Bienvenido Cotas who likewise
maintains an account with the same bank. During this period, petitioner bank had, however, On appeal, the appellate court affirmed the foregoing decision with modifications, viz:
been regularly furnishing private respondent with monthly statements showing its current
accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to check WHEREFORE, the decision appealed from herein is MODIFIED in the sense
these monthly statements of account reposing complete trust and confidence on petitioner that the awards of exemplary damages and attorney's fees specified therein
bank. are eliminated and instead, appellants are ordered to pay plaintiff, in addition
to the principal sum of P304,979.74 representing plaintiff's lost deposit plus
Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies legal interest thereon from the filing of the complaint, P25,000.00 attorney's
of the deposit slip, an original and a duplicate. The original showed the name of her husband fees and costs in the lower court as well as in this Court.3
as depositor and his current account number. On the duplicate copy was written the account
number of her husband but the name of the account holder was left blank. PBC's teller, Hence, this petition anchored on the following grounds:
Azucena Mabayad, would, however, validate and stamp both the original and the duplicate of
these deposit slips retaining only the original copy despite the lack of information on the 1) The proximate cause of the loss is the negligence of respondent Rommel Marketing
duplicate slip. The second copy was kept by Irene Yabut allegedly for record purposes. After Corporation and Romeo Lipana in entrusting cash to a dishonest employee.
validation, Yabut would then fill up the name of RMC in the space left blank in the duplicate
copy and change the account number written thereon, which is that of her husband's, and
2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's
make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily
statements of account with its own records during the entire period of more than one (1)
remittance records also prepared by Ms. Yabut and submitted to private respondent RMC
year is the proximate cause of the commission of subsequent frauds and
together with the validated duplicate slips with the latter's name and account number, she
misappropriation committed by Ms. Irene Yabut.
made her company believe that all the while the amounts she deposited were being credited
to its account when, in truth and in fact, they were being deposited by her and credited by the
petitioner bank in the account of Cotas. This went on in a span of more than one (1) year 3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing
without private respondent's knowledge. Corporation are falsified and are not proof that the amounts appearing thereon were
deposited to respondent Rommel Marketing Corporation's account with the bank,
Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its
money, but as its demand went unheeded, it filed a collection suit before the Regional Trial 4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her
Court of Pasig, Branch 160. The trial court found petitioner bank negligent and ruled as fraudulent acts against respondent Rommel Marketing Corporation, and not as records of
follows: deposits she made with the bank.4
The petition has no merit. 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 supplied by the imaginary conduct
Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the of the discreet  paterfamilias of the Roman law. The existence of negligence in a given case is
tune of P304,979.74, suffered by the private respondent RMC — petitioner bank's negligence not determined by reference to the personal judgment of the actor in the situation before him.
or that of private respondent's? The law considers what would be reckless, blameworthy, or negligent in the man of ordinary
intelligence and prudence and determines liability by that.
Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC
and Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was
Yabut.5 According to them, it was impossible for the bank to know that the money deposited negligent in validating, officially stamping and signing all the deposit slips prepared and
by Ms. Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will presented by Ms. Yabut, despite the glaring fact that the duplicate copy was not completely
be depositing cash to its account. Thus, it was impossible for the bank to know the fraudulent accomplished contrary to the self-imposed procedure of the bank with respect to the proper
design of Yabut considering that her husband, Bienvenido Cotas, also maintained an account validation of deposit slips, original or duplicate, as testified to by Ms. Mabayad herself, thus:
with the bank. For the bank to inquire into the ownership of the cash deposited by Ms. Irene
Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad
dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC.6 your important duties and functions?

Private respondent, on the other hand, maintains that the proximate cause of the loss was the A: I accept current and savings deposits from depositors and encashments.
negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips,
both original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact Q: Now in the handling of current account deposits of bank clients, could you tell
that one of the deposit slips was not completely accomplished. us the procedure you follow?

We sustain the private respondent. A: The client or depositor or the authorized representative prepares a deposit slip
by filling up the deposit slip with the name, the account number, the date, the
Our law on quasi-delicts states: cash breakdown, if it is deposited for cash, and the check number, the amount
and then he signs the deposit slip.
Art. 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault or Q: Now, how many deposit slips do you normally require in accomplishing current
negligence, if there is no pre-existing contractual relation between the parties, account deposit, Mrs. Mabayad?
is called a quasi-delict and is governed by the provisions of this Chapter.
A: The bank requires only one copy of the deposit although some of our clients
There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or prepare the deposit slip in duplicate.
negligence of the defendant, or some other person for whose acts he must respond; and (c)
the connection of cause and effect between the fault or negligence of the defendant and the Q: Now in accomplishing current account deposits from your clients, what do you
damages incurred by the plaintiff.7 issue to the depositor to evidence the deposit made?

In the case at bench, there is no dispute as to the damage suffered by the private respondent A: We issue or we give to the clients the depositor's stub as a receipt of the
(plaintiff in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or deposit.
negligence which caused the damage where the parties point to each other as the culprit.
Q: And who prepares the deposit slip?
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 A: The depositor or the authorized representative sir?
of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old,
yet still relevant, case of Picart v. Smith,8 provides the test by which to determine the
existence of negligence in a particular case which may be stated as follows: Did the defendant Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the
in doing the alleged negligent act use that reasonable care and caution which an ordinarily deposit slip?
 A: The depositor's stub is connected with the deposit slip or the bank's copy. In a Q: The teller validated the blank deposit slip?
deposit slip, the upper portion is the depositor's stub and the lower portion is the
bank's copy, and you can detach the bank's copy from the depositor's stub by A: No it was not reported.
tearing it sir.
Q: You did not know that any one in the bank tellers or
Q: Now what do you do upon presentment of the deposit slip by the depositor or cashiers validated the blank deposit slip?
the depositor's authorized representative?
A: I am not aware of that.
A: We see to it that the deposit slip 9  is properly accomplished and then we count
the money and then we tally it with the deposit slip sir. Q: It is only now that you are aware of that?

Q: Now is the depositor's stub which you issued to your clients validated? A: Yes, sir. 13

A: Yes, sir. 10 [Emphasis ours] Prescinding from the above, public respondent Court of Appeals aptly observed:

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that xxx xxx xxx
the duplicate slip was not compulsorily required by the bank in accepting deposits
should not relieve the petitioner bank of responsibility. The odd circumstance alone
that such duplicate copy lacked one vital information — that of the name of the It was in fact only when he testified in this case in February, 1983, or after the
account holder — should have already put Ms. Mabayad on guard. Rather than lapse of more than seven (7) years counted from the period when the funds in
readily validating the incomplete duplicate copy, she should have proceeded more question were deposited in plaintiff's accounts (May, 1975 to July, 1976) that
cautiously by being more probing as to the true reason why the name of the account bank manager Bonifacio admittedly became aware of the practice of his teller
holder in the duplicate slip was left blank while that in the original was filled up. She Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton,
should not have been so naive in accepting hook, line and sinker the too shallow and inexcusable negligence in the appellant bank's supervision of its
excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her employees. 14
personal record, she would simply fill up the blank space later on. 11 A "reasonable
man of ordinary prudence" 12 would not have given credence to such explanation and It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner
would have insisted that the space left blank be filled up as a condition for validation. bank in the selection and supervision of its bank teller, which was the proximate cause of the
Unfortunately, this was not how bank teller Mabayad proceeded thus resulting in huge loss suffered by the private respondent, and not the latter's act of entrusting cash to a
losses to the private respondent. dishonest employee, as insisted by the petitioners.

Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself Proximate cause is determined on the facts of each case upon mixed considerations of logic,
in its lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the common sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case
testimony of Mr. Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank of Bank of the Phil. Islands v. Court of Appeals, 17 defines proximate cause as "that cause,
and now its Vice-President, to the effect that, while he ordered the investigation of the which, in natural and continuous sequence, unbroken by any efficient intervening cause,
incident, he never came to know that blank deposit slips were validated in total disregard of produces the injury, and without which the result would not have occurred. . . ." In this case,
the bank's validation procedures, viz: absent the act of Ms. Mabayad in negligently validating the incomplete duplicate copy of the
deposit slip, Ms. Irene Yabut would not have the facility with which to perpetrate her fraudulent
Q: Did he ever tell you that one of your cashiers affixed the scheme with impunity. Apropos, once again, is the pronouncement made by the respondent
stamp mark of the bank on the deposit slips and they appellate court, to wit:
validated the same with the machine, the fact that those
deposit slips were unfilled up, is there any report similar to . . . . Even if Yabut had the fraudulent intention to misappropriate the funds
that? entrusted to her by plaintiff, she would not have been able to deposit those
funds in her husband's current account, and then make plaintiff believe that it
A: No, it was not the cashier but the teller. was in the latter's accounts wherein she had deposited them, had it not been
 for bank teller Mabayad's aforesaid gross and reckless negligence. The As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the
latter's negligence was thus the proximate, immediate and efficient cause that depositor expects the bank to treat his account with the utmost fidelity, whether such account
brought about the loss claimed by plaintiff in this case, and the failure of consists only of a few hundred pesos or of millions. The bank must record every single
plaintiff to discover the same soon enough by failing to scrutinize the monthly transaction accurately, down to the last centavo, and as promptly as possible. This has to be
statements of account being sent to it by appellant bank could not have done if the account is to reflect at any given time the amount of money the depositor can
prevented the fraud and misappropriation which Irene Yabut had already dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A
completed when she deposited plaintiff's money to the account of her blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as
husband instead of to the latter's accounts. 18 they are made, can cause the depositor not a little embarrassment if not financial loss and
perhaps even civil and criminal litigation.
Furthermore, under the doctrine of "last clear chance" (also referred to, at times as
"supervening negligence" or as "discovered peril"), petitioner bank was indeed the culpable The point is that as a business affected with public interest and because of the nature of its
party. This doctrine, in essence, states that where both parties are negligent, but the negligent functions, the bank is under obligation to treat the accounts of its depositors with meticulous
act of one is appreciably later in time than that of the other, or when it is impossible to care, always having in mind the fiduciary nature of their relationship. In the case before us, it is
determine whose fault or negligence should be attributed to the incident, the one who had the apparent that the petitioner bank was remiss in that duty and violated that relationship.
last clear opportunity to avoid the impending harm and failed to do so is chargeable with the
consequences thereof. 19Stated differently, the rule would also mean that an antecedent Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's
negligence of a person does not preclude the recovery of damages for the supervening statements of account with its own records during the entire period of more than one (1) year
negligence of, or bar a defense against liability sought by another, if the latter, who had is the proximate cause of the commission of subsequent frauds and misappropriation
the last fair chance, could have avoided the impending harm by the exercise of due committed by Ms. Irene Yabut.
diligence. 20Here, assuming that private respondent RMC was negligent in entrusting cash to a
dishonest employee, thus providing the latter with the opportunity to defraud the company, as We do not agree.
advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had
the last clear opportunity to avert the injury incurred by its client, simply by faithfully observing
their self-imposed validation procedure. While it is true that had private respondent checked the monthly statements of account sent by
the petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be
used by the petitioners to escape liability. This omission on the part of the private respondent
At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in does not change the fact that were it not for the wanton and reckless negligence of the
dealing with their clients. petitioners' employee in validating the incomplete duplicate deposit slips presented by Ms.
Irene Yabut, the loss would not have occurred. Considering, however, that the fraud was
The New Civil Code provides: committed in a span of more than one (1) year covering various deposits, common human
experience dictates that the same would not have been possible without any form of collusion
Art. 1173. The fault or negligence of the obligor consists in the omission of between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the performance
that diligence which is required by the nature of the obligation and of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim
corresponds with the circumstances of the persons, of the time and of the reimbursement from her for whatever they shall be ordered to pay in this case.
place. When negligence shows bad faith, the provisions of articles 1171 and
2201, paragraph 2, shall apply. The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was
likewise negligent in not checking its monthly statements of account. Had it done so, the
If the law or contract does not state the diligence which is to be observed in company would have been alerted to the series of frauds being committed against RMC by its
the performance, that which is expected of a good father of a family shall be secretary. The damage would definitely not have ballooned to such an amount if only RMC,
required. (1104a) particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This
omission by RMC amounts to contributory negligence which shall mitigate the damages that
In the case of banks, however, the degree of diligence required is more than that of a good may be awarded to the private respondent 23 under Article 2179 of the New Civil Code, to wit:
father of a family. Considering the fiduciary nature of their relationship with their depositors,
banks are duty bound to treat the accounts of their clients with the highest degree of care. 21 . . . When the plaintiff's own negligence was the immediate and proximate
cause of his injury, he cannot recover damages. But if his negligence was
only contributory, the immediate and proximate cause of the injury being the
 defendant's lack of due care, the plaintiff may recover damages, but the WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-
courts shall mitigate the damages to be awarded. appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any
amount stated in the judgment.
In view of this, we believe that the demands of substantial justice are satisfied by
allocating the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack
respondent appellate court, except the award of P25,000.00 attorney's fees, shall be of merit.
borne by private respondent RMC; only the balance of 60% needs to be paid by the
petitioners. The award of attorney's fees shall be borne exclusively by the petitioners. In all other respect[s], the decision appealed from is AFFIRMED.[2]

WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the Also challenged is the April 14, 1999 CA Resolution, [3] which denied petitioners Motion for
amount of actual damages private respondent is entitled to by 40%. Petitioners may recover Reconsideration.
from Ms. Azucena Mabayad the amount they would pay the private respondent. Private
respondent shall have recourse against Ms. Irene Yabut. In all other respects, the appellate Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC)
court's decision is AFFIRMED. of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:

Proportionate costs. WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank &
SO ORDERED. Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May 10,
1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys
fees and litigation expenses and to pay the costs.
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M.
CUENCA, respondent.
SO ORDERED.
DECISION
PANGANIBAN, J.: The Facts

Being an onerous undertaking, a surety agreement is strictly construed against the

creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of The facts are narrated by the Court of Appeals as follows:[5]
fair play require the creditor to obtain the consent of the surety to any material alteration in the
principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta.
herein respondent liable for loans obtained in excess of the amount or beyond the period Ines) is a corporation engaged in logging operations. It was a holder of a Timber License
stipulated in the original agreement, absent any clear stipulation showing that the latter waived Agreement issued by the Department of Environment and Natural Resources (DENR).
his right to be notified thereof, or to give consent thereto. This is especially true where, as in
this case, respondent was no longer the principal officer or major stockholder of the corporate On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines
debtor at the time the later obligations were incurred. He was thus no longer in a position to Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos
compel the debtor to pay the creditor and had no more reason to bind himself anew to the (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its
subsequent obligations. logging operations.

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be
The Case
effective until 30 November 1981:

JOINT CONDITIONS:
This is the main principle used in denying the present Petition for Review under Rule 45
of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of the Court of
Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC
of the lines plus JSS of Rodolfo M. Cuenca. executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85,
DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating additional loans against the credit line.
therein the companys duly authorized signatory/ies;
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its
3. Reasonable/compensating deposit balances in current account shall be maintained at all loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC
times; in this connection, a Makati account shall be opened prior to availment on lines; accommodated appellant SIMCs request and signified its approval in a letter dated 18
February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to
or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of
4. Lines shall expire on November 30, 1981; and
defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-
appellant Sta. Ines the following loans:
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower. (Emphasis supplied.)
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant
To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit
credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34)
some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for and
the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement
dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
himself with SIMC as follows:
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G,
x x x x x x x x x Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix
excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred
aforesaid credit accommodation(s) including the substitutions, renewals, extensions, prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one
increases, amendments, conversions and revivals of the aforesaid credit covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca,
accommodation(s) x x x . (Emphasis supplied). Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together
with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by
the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.
[Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS- Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank,
3599-81 for said amount (Exhibit C). defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09
March 1988 in favor of [Petitioner] Security Bank:
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] PROMISSORY NOTE NO. AMOUNT
Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case RL/74/596/88 P8,800,000.00
No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said RL/74/597/88 P3,400,000.00
shares were bought by Adolfo Angala who was the highest bidder during the public auction. -------------------
TOTAL P12,200,000.00
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other
loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred (Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to
Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan November 30, 1981, and only for an amount not exceeding P8 million.
Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to
41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides: It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without the
consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of surety.
TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines
[c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to decided to materially alter or modify the principal obligation after the expiry date of the credit
be applied in the manner and for the purpose stipulated hereinbelow. accommodation.
Hence, this recourse to this Court.[7]
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the
Second Loan shall be applied to liquidate the past due interest and penalty portion of the
The Issues
Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p.
33)

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further In its Memorandum, petitioner submits the following for our consideration:[8]
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty- A. Whether or not the Honorable Court of Appeals erred in releasing Respondent
[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Cuenca from liability as surety under the Indemnity Agreement for the payment of
Expediente, at Vol. II, pp. 38, 70 to 165) the principal amount of twelve million two hundred thousand pesos
(P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated
SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were interests, penalties and other charges due thereon;
made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L),
respectively. i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered
only availments on SIMCs credit line to the extent of eight million
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed pesos (P8,000,000.00) and made on or before 30 November 1981;
a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits
in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed. ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC
Ruling of the Court of Appeals without Respondent Cuencas consent, thus extinguishing his liability
under the Indemnity Agreement pursuant to Article 2079 of the Civil
Code;
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan iii. Whether or not the Honorable Court of appeals erred in ruling that the
Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. restructuring of SIMCs indebtedness under the P8 million credit
Ines.Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, accommodation constituted a novation of the principal obligation, thus
who was then the Board chairman and president of Sta. Ines, had bound himself solidarily extinguishing Respondent Cuencas liability under the indemnity
liable for the payment of the loans secured by that credit accommodation. It noted that the agreement;
1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca
who at the time was no longer a stockholder of the corporation. B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
The appellate court also noted that the Credit Approval Memorandum had specified that
the credit accommodation was for a total amount of P8 million, and that its expiry date was C. Whether or not petitioners Motion for Reconsideration was pro-forma;
 D. Whether or not service of the Petition by registered mail sufficiently complied with aborting the right to appeal by a literal application of the procedural rules relating to pro forma
Section 11, Rule 13 of the 1997 Rules of Civil Procedure. motions for reconsideration.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989
Loan Agreement novated the original credit accommodation and Cuencas liability under the
Service by Registered Mail Sufficiently Explained
Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase, amendment, conversion or revival of
the said credit accommodation. As preliminary matters, the procedural questions raised by
respondent will also be addressed. Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and
The Courts Ruling filing of pleadings and other papers shall be done personally. Except with respect to papers
emanating from the court, a resort to other modes must be accompanied by a written
explanation why the service or filing was not done personally. A violation of this Rule may be
The Petition has no merit. cause to consider the paper as not filed.

Respondent maintains that the present Petition for Review does not contain a sufficient
Preliminary Matters: Procedural Questions
written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the
aforecited rule was mandatory, and that only when personal service or filing is not practicable
Motion for Reconsideration Not Pro Forma may resort to other modes be had, which must then be accompanied by a written explanation
as to why personal service or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta.
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and
merely rehashing the arguments already passed upon by the appellate court, was pro forma; distance.[14] This explanation sufficiently shows that personal service was not practicable. In
that as such, it did not toll the period for filing the present Petition for Review. any event, we find no adequate reason to reject the contention of petitioner and thereby
[9]
 Consequently, the Petition was filed out of time.[10] deprive it of the opportunity to fully argue its cause.
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained
that a movant may raise the same arguments, precisely to convince the court that its ruling First Issue: Original Obligation Extinguished by Novation

was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to delay the An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil
proceedings. In Marikina Valley Development Corporation v. Flojo, [12] the Court explained that Code, which reads as follows:
a pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, where the circumstances of a case do not show an intent on the part of
ART. 1292. In order that an obligation may be extinguished by another which substitute the
the movant merely to delay the proceedings, our Court has refused to characterize the motion
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
as simply pro forma. It held:
obligations be on every point incompatible with each other.
We note finally that because the doctrine relating to pro forma motions for reconsideration
Novation of a contract is never presumed. It has been held that [i]n the absence of an
impacts upon the reality and substance of the statutory right of appeal, that doctrine should be
express agreement, novation takes place only when the old and the new obligations are
applied reasonably, rather than literally. The right to appeal, where it exists, is an important
incompatible on every point.[15] Indeed, the following requisites must be established: (1) there
and valuable right. Public policy would be better served by according the appellate court an
is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old
effective opportunity to review the decision of the trial court on the merits, rather than by
contract is extinguished; and (4) there is a valid new contract.[16]
 Petitioner contends that there was no absolute incompatibility between the old and the Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
new obligations, and that the latter did not extinguish the earlier one. It further argues that the the P8 million original accommodation; it was not a novation.[25]
1989 Agreement did not change the original loan in respect to the parties involved or the
obligations incurred. It adds that the terms of the 1989 Contract were not more onerous. This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
[17]
 Since the original credit accomodation was not extinguished, it concludes that Cuenca is stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
still liable under the Indemnity Agreement. indebtedness.Moreover, respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility. Hence, his obligation as a
We reject these contentions. Clearly, the requisites of novation are present in this surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which
case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the 1980 credit specifically states that [a]n extension granted to the debtor by the creditor without the consent
accomodation.This is evident from its explicit provision to liquidate the principal and the of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the Court explained the
interest of the earlier indebtedness, as the following shows: rationale of this provision in this wise:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the The theory behind Article 2079 is that an extension of time given to the principal debtor by the
Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the creditor without the suretys consent would deprive the surety of his right to pay the creditor
Second Loan shall be applied to liquidate the past due interest and penalty portion of the and to be immediately subrogated to the creditors remedies against the principal debtor upon
Indebtedness.[19] (Italics supplied.) the maturity date. The surety is said to be entitled to protect himself against the contingency of
the principal debtor or the indemnitors becoming insolvent during the extended period.
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement
were used to pay-off the original indebtedness serves to strengthen this ruling.[21]
Binding Nature of the Credit Approval Memorandum
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the
As noted earlier, the appellate court relied on the provisions of the Credit Approval
1989 Agreement provided that the loan was P12.2 million. The periods for payment were also
Memorandum in holding that the credit accommodation was only for P8 million, and that it was
different.
for a period of one year ending on November 30, 1981. Petitioner objects to the appellate
Likewise, the later contract contained conditions, positive covenants and negative courts reliance on that document, contending that it was not a binding agreement because it
covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines was not signed by the parties. It adds that it was merely for its internal use.
undertook from time to time and upon request by the Lender, [to] perform such further acts
We disagree. It was petitioner itself which presented the said document to prove the
and/or execute and deliver such additional documents and writings as may be necessary or
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the
proper to effectively carry out the provisions and purposes of this Loan Agreement.
[23] accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval
 Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset
Memorandum in this wise:
owned or hereafter acquired, nor would it participate in any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the 4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in
Article 1296 of the Civil Code, which provides: meeting the additional capitalization requirements for its logging operations. For this purpose,
the Bank issued a Credit Approval Memorandum dated 10 November 1980.
ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did not Clearly, respondent is estopped from denying the terms and conditions of the P8 million
give their consent. credit accommodation as contained in the very document it presented to the courts. Indeed, it
cannot take advantage of that document by agreeing to be bound only by those portions that
are favorable to it, while denying those that are disadvantageous.
Alleged Extension

Second Issue: Alleged Waiver of Consent

 Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his respondent who was solidarily liable. Taking the banks submission to the extreme, respondent
consent to any modification of the credit accommodation or otherwise waived his right to be (or his successors) would be liable for loans even amounting to, say, P100 billion obtained
notified of, or to give consent to, the same.[28] Respondents consent or waiver thereof is 100 years after the expiration of the credit accommodation, on the ground that he consented
allegedly found in the Indemnity Agreement, in which he held himself liable for the credit to all alterations and extensions thereof.
accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival. It explains that the novation of the original credit accommodation by Indeed, it has been held that a contract of surety cannot extend to more than what is
the 1989 Loan Agreement is merely its renewal, which connotes cessation of an old contract stipulated. It is strictly construed against the creditor, every doubt being resolved against
and birth of another one x x x.[29] enlarging the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal
principle that if there is any doubt on the terms and conditions of the surety agreement, the
At the outset, we should emphasize that an essential alteration in the terms of the Loan doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed
Agreement without the consent of the surety extinguishes the latters obligation. As the Court against the party who caused the ambiguity.[32] In the absence of an unequivocal provision that
held in National Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any respondent waived his right to be notified of or to give consent to any alteration of the credit
agreement between the creditor and the principal debtor which essentially varies the terms of accommodation, we cannot sustain petitioners view that there was such a waiver.
the principal contract, without the consent of the surety, will release the surety from liability.
It should also be observed that the Credit Approval Memorandum clearly shows that the
In this case, petitioners assertion - that respondent consented to the alterations in the bank did not have absolute authority to unilaterally change the terms of the loan
credit accommodation -- finds no support in the text of the Indemnity Agreement, accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
which isreproduced hereunder: condition:

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products 5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon
Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of written notice to the Borrower.[33]
the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted
by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro entitled to be notified of any modification in the original loan accommodation.[34] Following the
Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given;
PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated but would still be valid as to respondent to whom no notice need be given. The latters liability
interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], would thus be more burdensome than that of the former. Such untenable theory is contrary to
made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) the principle that a surety cannot assume an obligation more onerous than that of the
himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment principal.[35]
, upon demand and without benefit of excussion of whatever amount or amounts the CLIENT
may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the
including the substitutions, renewals, extensions, increases, amendment, conversions and Court sustained a stipulation whereby the surety consented to be bound not only for the
revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of specified period, but to any extension thereafter made, an extension x x x that could be had
such other obligations that the CLIENT may owe the BANK, whether direct or indirect, without his having to be notified.
principal or secondary, as appears in the accounts, books and records of the BANK, plus
In that case, the surety agreement contained this unequivocal stipulation: It is hereby
interest and expenses arising from any agreement or agreements that may have heretofore
further agreed that in case of any extension of renewal of the bond, we equally bind ourselves
been made, or may hereafter be executed by and between the parties thereto, including the
to the Company under the same terms and conditions as herein provided without the
substitutions, renewals, extensions, increases, amendments, conversions and revivals of the
necessity of executing another indemnity agreement for the purpose and that we hereby
aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in
equally waive our right to be notified of any renewal or extension of the bond which may be
favor of the BANK for the faithful compliance of all the terms and conditions contained in the
granted under this indemnity agreement.
aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof
by reference. In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank
While respondent held himself liable for the credit accommodation or any modification or Sta. Ines to modify or extend the original obligation without the consent of the surety or
thereof, such clause should be understood in the context of the P8 million limit and the notice thereto.
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature
and scope of the original credit accommodation, without informing or getting the consent of
Continuing Surety
Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no reason or logic, however, for the
Contending that the Indemnity Agreement was in the nature of a continuing surety, bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan
petitioner maintains that there was no need for respondent to execute another surety contract Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-
to secure the 1989 Loan Agreement. corporation. Verily, he was not in a position then to ensure the payment of the
obligation. Neither did he have any reason to bind himself further to a bigger and more
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
onerous obligation.
authorize the bank to extend the scope of the principal obligation inordinately. [37] In Dino v. CA,
[38]
 the Court held that a continuing guaranty is one which covers all transactions, including Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
those arising in the future, which are within the description or contemplation of the contract of respondent, without even informing him, smacks of negligence on the part of the bank and
guaranty, until the expiration or termination thereof. bad faith on that of the principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit of fair play should have
To repeat, in the present case, the Indemnity Agreement was subject to the two
impelled Sta. Ines to ask somebody else to act as a surety for the new loan.
limitations of the credit accommodation: (1) that the obligation should not exceed P8 million,
and (2) that the accommodation should expire not later than November 30, 1981. Hence, In the same vein, a little prudence should have impelled the bank to insist on the JSS of
it was a continuing surety only in regard to loans obtained on or before the aforementioned one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at
expiry date and not exceeding the total of P8 million. credit investigation would have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
order to collect an obligation that could have been secured by a fairly obtained surety. For its
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
defeat in this litigation, the bank has only itself to blame.
accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the
1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation
the stipulated P8 million ceiling. under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had
been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore,
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
we reject petitioners submission that respondent waived his right to be notified of, or to give
loan obtained after the payment of the original one, which was covered by a continuing surety
consent to, any modification or extension of the 1980 credit accommodation.
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement
specifically provided that each suretyship is a continuing one which shall remain in full force In this light, we find no more need to resolve the issue of whether the loan obtained
and effect until this bank is notified of its revocation. Since the bank had not been notified of before the expiry date of the credit accommodation has been paid.
such revocation, the surety was held liable even for the subsequent obligations of the principal
borrower. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
No similar provision is found in the present case. On the contrary, respondents liability
was confined to the 1980 credit accommodation, the amount and the expiry date of which SO ORDERED.
were set down in the Credit Approval Memorandum.
G.R. No. L-30511 February 14, 1980

Special Nature of the JSS MANUEL M. SERRANO, petitioner, 

vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
It is a common banking practice to require the JSS (joint and solidary signature) of a RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA,
major stockholder or corporate officer, as an additional security for loans granted to HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA,
corporations.There are at least two reasons for this. First, in case of default, the creditors RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO
recourse, which is normally limited to the corporate properties under the veil of separate TANJUATCO, respondents.
corporate personality,would extend to the personal assets of the surety. Second, such surety
would be compelled to ensure that the loan would be used for the purpose agreed upon, and Rene Diokno for petitioner.
that it would be paid by the corporation.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines. not a single one of the time deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas
Bank of Manila. Respondent Central Bank admits that it is charged with the duty of administering the banking
system of the Republic and it exercises supervision over all doing business in the Philippines,
Josefina G. Salonga for all other respondents. but denies the petitioner's allegation that the Central Bank has the duty to exercise a most
rigid and stringent supervision of banks, implying that respondent Central Bank has to watch
every move or activity of all banks, including respondent Overseas Bank of Manila.
Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila,
while operating, was only on a limited degree of banking operations since the Monetary Board
CONCEPCION, JR., J.: decided in its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of
Manila from making new loans and investments in view of its chronic reserve deficiencies
Petition for mandamus  and prohibition, with preliminary injunction, that seeks the against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila
establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand continued up to 1968.7
Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank
of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return Respondent Central Bank also denied that it is guarantor of the permanent solvency of any
the time deposits made by petitioner and assigned to him, on the ground that respondent banking institution as claimed by petitioner. It claims that neither the law nor sound banking
Central Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of supervision requires respondent Central Bank to advertise or represent to the public any
Manila to protect depositors and the general public.1 Petitioner also prays that both remedial measures it may impose upon chronic delinquent banks as such action may
respondent banks be ordered to execute the proper and necessary documents to constitute all inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to
properties fisted in Annex "7" of the Answer of respondent Central Bank of the Philippines in declare the respondent Overseas Bank of Manila as insolvent. 8
G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into
a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank of
Respondent Central Bank likewise denied that a constructive trust was created in favor of
Manila. It is also prayed that the respondents be prohibited permanently from honoring,
petitioner and his predecessor in interest Concepcion Maneja when their time deposits were
implementing, or doing any act predicated upon the validity or efficacy of the deeds of
made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the
mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties
latter was not an insolvent bank and its operation as a banking institution was being salvaged
listed in Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352.2
by the respondent Central Bank. 9
A sought for ex-parte preliminary injunction against both respondent banks was not given by
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
this Court.
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of
the Philippines for the former's overdrafts and emergency loans were acquired through the
Undisputed pertinent facts are: use of depositors' money, including that of the petitioner and Concepcion Maneja. 10

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines,"  a
with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought
Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6- to prevent respondent Central Bank from closing, declaring the former insolvent, and
½% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a
same respondent Overseas Bank of Manila.4 motion to intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal
interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case.
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to
conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent intervene in that case, on the ground that his claim as depositor of the Overseas Bank of
Overseas Bank of Manila. 5 Manila should properly be ventilated in the Court of First Instance, and if this Court were to
allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors
Notwithstanding series of demands for encashment of the aforementioned time deposits from would follow and thus cause an avalanche of cases in this Court. In the resolution dated
the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968,
October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said motion Central Bank for the former's overdrafts and emergency loans, since these collaterals were
to intervene are substantially the same as those of the present petition. 11 acquired by the use of depositors' money.

This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final Bank deposits are in the nature of irregular deposits. They are really loans because they earn
and executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as
the dispositive portion to wit: loans and are to be covered by the law on loans. 14 Current and savings deposit are loans to a
bank because it can use the same. The petitioner here in making time deposits that earn
WHEREFORE, the writs prayed for in the petition are hereby granted and interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of
the Overseas Bank of Manila to participate in clearing, direct the suspension he respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not
of its operation, and ordering the liquidation of said bank) are hereby annulled a breach of trust arising from depositary's failure to return the subject matter of the deposit
and set aside; and said respondent Central Bank of the Philippines is directed
to comply with its obligations under the Voting Trust Agreement, and to desist WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
from taking action in violation therefor. Costs against respondent Central
Bank of the Philippines. 12 SO ORDERED.

Because of the above decision, petitioner in this case filed a motion for judgment in this case, G.R. No. 90027 March 3, 1993
praying for a decision on the merits, adjudging respondent Central Bank jointly and severally
liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, 
made with the latter bank, with all interests due therein; and declaring all assets assigned or vs.
mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
Central Bank as trust funds for the benefit of petitioner and other depositors. 13 COMPANY, respondents.

By the very nature of the claims and causes of action against respondents, they in reality are Dolorfino & Dominguez Law Offices for petitioner.
recovery of time deposits plus interest from respondent Overseas Bank of Manila, and
recovery of damages against respondent Central Bank for its alleged failure to strictly
supervise the acts of the other respondent Bank and protect the interests of its depositors by Danilo B. Banares for private respondent.
virtue of the constructive trust created when respondent Central Bank required the other
respondent to increase its collaterals for its overdrafts said emergency loans, said collaterals
allegedly acquired through the use of depositors money. These claims shoud be ventilated in
the Court of First Instance of proper jurisdiction as We already pointed out when this Court DAVIDE, JR., J.:
denied petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature are not
proper in actions for mandamus and prohibition as there is no shown clear abuse of discretion Is the contractual relation between a commercial bank and another party in a contract of rent
by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee
Manila, and if there was, petitioner here is not the proper party to raise that question, but or one of lessor and lessee?
rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to
prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of
This is the crux of the present controversy.
dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends to use
as his basis for claims of damages against respondent Central Bank, had been accomplished
a long time ago. On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and
Paula Pugao entered into an agreement whereby the former purchased from the latter two (2)
parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as
Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits
downpayment while the balance was covered by three (3) postdated checks. Among the terms
when the petitioner claimed that there should be created a constructive trust in his favor when
and conditions of the agreement embodied in a Memorandum of True and Actual Agreement
the respondent Overseas Bank of Manila increased its collaterals in favor of respondent
of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full
payment of the purchase price and that the owner's copies of the certificates of titles thereto,
Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety WHEREFORE, premises considered, judgment is hereby rendered dismissing
deposit box of any bank. The same could be withdrawn only upon the joint signatures of a plaintiff's complaint.
representative of the petitioner and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to
of private respondent Security Bank and Trust Company, a domestic banking corporation pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as
hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of attorney's fees.
lease (Exhibit "2") which contains, inter alia, the following conditions:
With costs against plaintiff.6
13. The bank is not a depositary of the contents of the safe and it has neither
the possession nor control of the same. The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and
14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The
14. The bank has no interest whatsoever in said contents, except herein court declared that the said provisions are binding on the parties.
expressly provided, and it assumes absolutely no liability in connection
therewith.1 Its motion for reconsideration7 having been denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No.
After the execution of the contract, two (2) renter's keys were given to the renters — one to 15150. Petitioner urged the respondent Court to reverse the challenged decision because the
Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not
possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the declaring as null and void, for being contrary to law, public order and public policy, the
guard key and the other for the renter's key, and can be opened only with the use of both provisions in the contract for lease of the safety deposit box absolving the Bank from any
keys. Petitioner claims that the certificates of title were placed inside the said box. liability for loss, (c) not concluding that in this jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees.8
at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates
to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the appealed decision
Ramos demanded the execution of a deed of sale which necessarily entailed the production of principally on the theory that the contract (Exhibit "2") executed by the petitioner and
the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its
to the respondent Bank on 4 October 1979 to open the safety deposit box and get the co-renter were given control over the safety deposit box and its contents while the Bank
certificates of title. However, when opened in the presence of the Bank's representative, the retained no right to open the said box because it had neither the possession nor control over it
box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which
Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the provides:
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed
on 1 September 1980 a complaint2 for damages against the respondent Bank with the Court of Art. 1643. In the lease of things, one of the parties binds himself to give to
First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as another the enjoyment or use of a thing for a price certain, and for a period
Civil Case No. 38382. which may be definite or indefinite. However, no lease for more than ninety-
nine years shall be valid.
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no cause of
action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss It invoked Tolentino vs. Gonzales  11 — which held that the owner of the property loses
of any of the items or articles contained in the box could not give rise to an action against it. It his control over the property leased during the period of the contract — and Article
then interposed a counterclaim for exemplary damages as well as attorney's fees in the 1975 of the Civil Code which provides:
amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.4
Art. 1975. The depositary holding certificates, bonds, securities or instruments
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) which earn interest shall be bound to collect the latter when it becomes due,
of Pasig, Metro Manila, rendered a decision5 adverse to the petitioner on 8 December 1986, and to take such steps as may be necessary in order that the securities may
the dispositive portion of which reads: preserve their value and the rights corresponding to them according to law.
 The above provision shall not apply to contracts for the rent of safety deposit The prevailing rule appears to be that where a safe-deposit company leases a
boxes. safe-deposit box or safe and the lessee takes possession of the box or safe
and places therein his securities or other valuables, the relation of bailee and
and then concluded that "[c]learly, the defendant-appellee is not under any duty to bail or is created between the parties to the transaction as to such securities
maintain the contents of the box. The stipulation absolving the defendant-appellee or other valuables; the fact that the
from liability is in accordance with the nature of the contract of lease and cannot be safe-deposit company does not know, and that it is not expected that it shall
regarded as contrary to law, public order and public policy." 12 The appellate court was know, the character or description of the property which is deposited in such
quick to add, however, that under the contract of lease of the safety deposit box, safe-deposit box or safe does not change that relation. That access to the
respondent Bank is not completely free from liability as it may still be made contents of the safe-deposit box can be had only by the use of a key retained
answerable in case unauthorized persons enter into the vault area or when the rented by the lessee ( whether it is the sole key or one to be used in connection with
box is forced open. Thus, as expressly provided for in stipulation number 8 of the one retained by the lessor) does not operate to alter the foregoing rule. The
contract in question: argument that there is not, in such a case, a delivery of exclusive possession
and control to the deposit company, and that therefore the situation is entirely
different from that of ordinary bailment, has been generally rejected by the
8. The Bank shall use due diligence that no unauthorized person shall be
courts, usually on the ground that as possession must be either in the
admitted to any rented safe and beyond this, the Bank will not be responsible
depositor or in the company, it should reasonably be considered as in the
for the contents of any safe rented from it. 13
latter rather than in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and the depositor
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 cannot gain access thereto without the consent and active participation of the
August 1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us company. . . . (citations omitted).
to review and set aside the respondent Court's ruling. Petitioner avers that both the
respondent Court and the trial court (a) did not properly and legally apply the correct law in
and a segment from Words and Phrases 18 which states that a contract for the rental
this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to
of a bank safety deposit box in consideration of a fixed amount at stated periods is a
lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents
bailment for hire.
adhered to and affirmed by decisions of this Court and precepts in American jurisprudence
adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider
the trial court's decision, the brief submitted to the respondent Court and the motion to Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to
reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of law and public policy and should be declared null and void. In support thereof, it cites Article
nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a 1306 of the Civil Code which provides that parties to a contract may establish such
contract of deposit governed by Title XII, Book IV of the Civil Code of the stipulations, clauses, terms and conditions as they may deem convenient, provided they are
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the not contrary to law, morals, good customs, public order or public policy.
certificates of title pursuant to Article 1972 of the said Code which provides:
After the respondent Bank filed its comment, this Court gave due course to the petition and
Art. 1972. The depositary is obliged to keep the thing safely and to return it, required the parties to simultaneously submit their respective Memoranda.
when required, to the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract. His responsibility, with The petition is partly meritorious.
regard to the safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book. We agree with the petitioner's contention that the contract for the rent of the safety deposit box
is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We
If the deposit is gratuitous, this fact shall be taken into account in determining do not fully subscribe to its view that the same is a contract of deposit that is to be strictly
the degree of care that the depositary must observe. governed by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a
special kind of deposit. It cannot be characterized as an ordinary contract of lease under
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed Article 1643 because the full and absolute possession and control of the safety deposit box
to expound on the prevailing rule in the United States, to wit: was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box
remained with the respondent Bank; without this key, neither of the renters could open the
box. On the other hand, the respondent Bank could not likewise open the box without the
renter's key. In this case, the said key had a duplicate which was made so that both renters Note that the primary function is still found within the parameters of a contract of deposit, i.e.,
could have access to the box. the receiving in custody of funds, documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but related to or in conjunction
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither with, this principal function. A contract of deposit may be entered into orally or in writing 25 and,
could Article 1975, also relied upon by the respondent Court, be invoked as an argument pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a clauses, terms and conditions as they may deem convenient, provided they are not contrary to
depositary of certificates, bonds, securities or instruments which earn interest if such law, morals, good customs, public order or public policy. The depositary's responsibility for the
documents are kept in a rented safety deposit box. It is clear that the depositary cannot open safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the
the box without the renter being present. Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of
We observe, however, that the deposit theory itself does not altogether find unanimous
a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability
support even in American jurisprudence. We agree with the petitioner that under the latter, the
arising from the loss of the thing deposited on account of fraud, negligence or delay would be
prevailing rule is that the relation between a bank renting out safe-deposit boxes and its
void for being contrary to law and public policy. In the instant case, petitioner maintains that
customer with respect to the contents of the box is that of a bail or and bailee, the bailment
conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
being for hire and mutual benefit. 21 This is just the prevailing view because:

13. The bank is not a depositary of the contents of the safe and it has neither
There is, however, some support for the view that the relationship in question
the possession nor control of the same.
might be more properly characterized as that of landlord and tenant, or lessor
and lessee. It has also been suggested that it should be characterized as that
of licensor and licensee. The relation between a bank, safe-deposit company, 14. The bank has no interest whatsoever in said contents, except herein
or storage company, and the renter of a safe-deposit box therein, is often expressly provided, and it assumes absolutely no liability in connection
described as contractual, express or implied, oral or written, in whole or in therewith. 28
part. But there is apparently no jurisdiction in which any rule other than that
applicable to bailments governs questions of the liability and rights of the are void as they are contrary to law and public policy. We find Ourselves in agreement
parties in respect of loss of the contents of safe-deposit boxes. 22 (citations with this proposition for indeed, said provisions are inconsistent with the respondent
omitted) Bank's responsibility as a depositary under Section 72(a) of the General Banking Act.
Both exempt the latter from any liability except as contemplated in condition 8 thereof
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, which limits its duty to exercise reasonable diligence only with respect to who shall be
it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. admitted to any rented safe, to wit:
Section 72 of the General Banking Act 23pertinently provides:
8. The Bank shall use due diligence that no unauthorized person shall be
Sec. 72. In addition to the operations specifically authorized elsewhere in this admitted to any rented safe and beyond this, the Bank will not be responsible
Act, banking institutions other than building and loan associations may for the contents of any safe rented from it. 29
perform the following services:
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual
(a) Receive in custody funds, documents, and valuable practice of the Bank. It is not correct to assert that the Bank has neither the
objects, and rent safety deposit boxes for the safeguarding of possession nor control of the contents of the box since in fact, the safety deposit box
such effects. itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank cooperates by presenting and
xxx xxx xxx
using this guard key. Clearly then, to the extent above stated, the foregoing conditions
in the contract in question are void and ineffective. It has been said:
The banks shall perform the services permitted under subsections (a), (b) and
(c) of this section as depositories  or as agents. . . . 24 (emphasis supplied)
With respect to property deposited in a safe-deposit box by a customer of a
safe-deposit company, the parties, since the relation is a contractual one, may
 by special contract define their respective duties or provide for increasing or SO ORDERED.
limiting the liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there actually was G.R. No. 104612 May 10, 1994
such a special contract, however, in order to vary the ordinary obligations
implied by law from the relationship of the parties; liability of the deposit BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND
company will not be enlarged or restricted by words of doubtful meaning. The TRUST CO.), petitioner, 
company, in renting vs.
safe-deposit boxes, cannot exempt itself from liability for loss of the contents HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D.
by its own fraud or negligence or that of its agents or servants, and if a LIM, respondents.
provision of the contract may be construed as an attempt to do so, it will be
held ineffective for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the contents thereof Leonen, Ramirez & Associates for petitioner.
through its own negligence, the view has been taken that such a lessor may
limits its liability to some extent by agreement or stipulation. 30 (citations Constante A. Ancheta for private respondents.
omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the
petition should be dismissed, but on grounds quite different from those relied upon by the DAVIDE, JR., J.:
Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to
the holding of the Court of Appeals, be based on or proceed from a characterization of the The petitioner urges us to review and set aside the amended Decision1 of 6 March 1992 of
impugned contract as a contract of lease, but rather on the fact that no competent proof was respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15
presented to show that respondent Bank was aware of the agreement between the petitioner November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-
and the Pugaos to the effect that the certificates of title were withdrawable from the safety 42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and
deposit box only upon both parties' joint signatures, and that no evidence was submitted to Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of
reveal that the loss of the certificates of title was due to the fraud or negligence of the Appeals had affirmed the dismissal of the complaint but had granted the defendants'
respondent Bank. This in turn flows from this Court's determination that the contract involved counterclaim for P331,261.44 which represents the outstanding balance of their account with
was one of deposit. Since both the petitioner and the Pugaos agreed that each should have the plaintiff.
one (1) renter's key, it was obvious that either of them could ask the Bank for access to the
safety deposit box and, with the use of such key and the Bank's own guard key, could open
As culled from the records and the pleadings of the parties, the following facts were duly
the said box, without the other renter being present.
established:
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith
Private respondents Eastern Plywood Corporation (Eastern) and
on its part had been established, the trial court erred in condemning the petitioner to pay the
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank
respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public
account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-
respondent Court of Appeals must be modified.
in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint
checking account ("and" account) with Lim in the amount of P120,000.00 was opened by
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The
CV No. 15150. As modified, and subject to the pronouncement We made above on the nature money therein was placed in the money market.
of the relationship between the parties in a contract of lease of safety deposit boxes, the
dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account
Review is otherwise DENIED for lack of merit.
stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim
for himself and as President and General Manager of Eastern, 2 one-half of this amount was
No pronouncement as to costs. provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as the joint account of Lim and Velasco and authorized the heirs to divide among themselves the
"Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit amount withdrawn. 8
Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino
Jimenez, and Eastern, through Lim, as its President and General Manager. 4The loan was Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the
payable on demand with interest at 14%  per annum. RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory
note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo.
payable on demand to the order of CBTC with interest at 14%  per annum. 5 The note was Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the
signed by Lim both in his own capacity and as President and General Manager of Eastern. No balance in the disputed account subject of the Holdout Agreement and the interests thereon
reference to any security for the loan appears on the note. In the Disclosure Statement, the after deducting the amount due on the promissory note.
box with the printed word "UNSECURED" was marked with "X" — meaning unsecured, while
the line with the words "this loan is wholly/partly secured by" is followed by the typewritten After due proceedings, the trial court rendered its decision on
words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of 15 November 1990 dismissing the complaint because BPI failed to make out its case.
Velasco and Lim with a balance of P331,261.44. Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out'
agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout debit the account of the defendants under the promissory note to set off the loan even though
Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court,
[Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs
Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said
alleged interests therein as these may appear as a result of final and definitive judicial action claim cannot be awarded without disturbing the resolution" of the intestate court. 12
or a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the
Agreement provides as follows: Both parties appealed from the said decision to the Court of Appeals. Their appeal was
docketed as CA-G.R. CV No. 25739.
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when
and if their alleged interests in the Account Balance shall have been On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the
established with finality, ample and sufficient power as shall be necessary to trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal
retain said Account Balance and enable Comtrust to apply the Account from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the
Balance for the purpose of liquidating the Loan in respect of principal and/or Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that
accrued interest. the settlement of Velasco's estate had nothing to do with the claim of the defendants for the
return of the balance of their account with CBTC/BPI as they were not privy to that case, and
And paragraph 05 thereof reads: that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI
should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account
The acceptance of this holdout shall not impair the right of Comtrust to was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of
declare the loan payable on demand at any time, nor shall the existence P331,261.44 representing the outstanding balance in the bank account of defendants." 14
hereof and the non-resolution of the dispute between the contending parties
in respect of entitlement to the Account Balance, preclude Comtrust from On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in
instituting an action for recovery against Eastply and/or Mr. Lim in the event question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall
the Loan is declared due and payable and Eastply and/or Mr. Lim shall default become a security for respondent Lim's promissory note only if respondents' Lim and Eastern
in payment of all obligations and liabilities thereunder. Plywood Corporation's interests to that amount are established as a result of a final and
definitive judicial action or a settlement between and among the contesting parties
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision
RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. dismissing the complaint on the ground that it was the duty of CBTC to debit the account of
No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of the defendants to set off the amount of P73,000.00 covered by the promissory note.
Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the
intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the
petitioner. They interpret the findings of both the trial and appellate courts that the money deposit subject of the Holdout Agreement to the payment of the promissory note for
deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the
as a finding that the money deposited in the joint account of Lim and Velasco "rightfully trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No.
belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming
the rightful owners of the money in question, the suspensive condition does not find any such dismissal.
application in this case and the bank had the duty to set off this deposit with the loan. They
add that the ruling of the lower court that they own the disputed amount is the final and The "suspensive condition" theory of the petitioner is, therefore, untenable.
definitive judicial action required by the Holdout Agreement; hence, the petitioner can only
hold the amount of P73,000.00 representing the security required for the note and must return The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and
the rest. 16 Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to
withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be
Rejoinder thereto. governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the
Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really
We gave due course to the petition and required the parties to submit simultaneously their loans because they earn interest. The relationship then between a depositor and a bank is
memoranda. one of creditor and debtor. The deposit under the questioned account was an ordinary bank
deposit; hence, it was payable on demand of the depositor. 22
The key issues in this case are whether BPI can demand payment of the loan of P73,000.00
despite the existence of the Holdout Agreement and whether BPI is still liable to the private The account was proved and established to belong to Eastern even if it was deposited in the
respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw
of Velasco. it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply
because it already allowed the heirs of Velasco to withdraw the whole balance of the account.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the The petitioner should not have allowed such withdrawal because it had admitted in the
note is an unconditional promise to pay the said amount, and as stated by the respondent Holdout Agreement the questioned ownership of the money deposited in the account. As early
Court of Appeals, "[t]here is no question that the promissory note is a negotiable as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in
instrument." 17 It further correctly ruled that BPI was not a holder in due course because the the joint account of Velasco and Lim was being claimed by them and that one-half was being
note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could claimed by the heirs of Velasco.23
have operated as a valid transfer to make BPI a holder in due course. It acquired the note
from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco
note subject to the Holdout Agreement. to withdraw the account. BPI was not specifically ordered to release the account to the said
heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs
We disagree, however, with the Court of Appeals in its interpretation of the Holdout of Velasco cannot be construed as a final determination or adjudication that the account
Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in- belonged to Velasco. We have ruled that when the ownership of a particular property is
interest, had every right to demand that Eastern and Lim settle their liability under the disputed, the determination by a probate court of whether that property is included in the
promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's estate of a deceased is merely provisional in character and cannot be the subject of
joint account to the payment of the note. What the agreement conferred on CBTC was execution. 24
a power, not a duty. Generally, a bank is under no duty or obligation to make the
application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect
which the bank has the option to exercise. 19 thereto, had no right to pay to persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is indisputable. The payment of the
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment
CBTC was not in any way precluded from demanding payment from Eastern and from to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment
instituting an action to recover payment of the loan. What it provides is an alternative, not an made by the debtor to the wrong party does not extinguish the obligation as to the creditor
exclusive, method of enforcing its claim on the note. When it demanded payment of the debt who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake
as to the person of the creditor, or through error induced by fraud of a third person. 26 The
payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its
obligation to the true depositor, Eastern.

In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set
aside. The award on the counterclaim is sustained subject to a modification of the interest.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in
CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:

(1) Private respondents are ordered to pay the petitioner the promissory note
for P73,000.00 with interest at:

(a) 14%  per annum on the principal, computed from

18 August 1978 until payment;

(b) 12% per annum on the interest which had accrued up to

the date of the filing of the complaint, computed from that
date until payment pursuant to Article 2212 of the Civil Code.

(2) The award of P331,264.44 in favor of the private respondents shall bear
interest at the rate of 12%per annum computed from the filing of the
counterclaim.

No pronouncement as to costs.

SO ORDERED.