GENERAL BANKING LAWS

1. Philippine Commercial International Bank vs Court of Appeals (2001)

There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and
Citibank), G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604 (Ford
vs Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in
favor of the Commissioner of the Internal Revenue (CIR). The check represents Fords tax
payment for the third quarter of 1977. On the face of the check was written Payees account
only which means that the check cannot be encashed and can only be deposited with the
CIRs savings account (which is with Metrobank). The said check was however presented to
PCIB and PCIB accepted the same. PCIB then indorsed the check for clearing to Citibank.
Citibank cleared the check and paid PCIB P4,746,114.41. CIR later informed Ford that it
never received the tax payment.
An investigation ensued and it was discovered that Fords accountant Godofredo Rivera,
when the check was deposited with PCIB, recalled the check since there was allegedly an
error in the computation of the tax to be paid. PCIB, as instructed by Rivera, replaced the
check with two of its managers checks.
It was further discovered that Rivera was actually a member of a syndicate and the managers
checks were subsequently deposited with the Pacific Banking Corporation by other members
of the syndicate. Thereafter, Rivera and the other members became fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and
P6,311,591.73 respectively. Both checks are again for tax payments. Both checks are for
Payees account only or for the CIRs bank savings account only with Metrobank. Again,
these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same syndicate to
which Rivera was a member. It was established that an employee of PCIB, also a member of
the syndicate, created a PCIB account under a fictitious name upon which the two checks,
through high end manipulation, were deposited. PCIB unwittingly endorsed the checks to
Citibank which the latter cleared. Upon clearing, the amount was withdrawn from the fictitious
account by syndicate members.
ISSUE: What are the liabilities of each party?
HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank has
been negligent in verifying the authority of Rivera to negotiate the check. It failed to ascertain
whether or not Rivera can validly recall the check and have them be replaced with PCIBs
managers checks as in fact, Ford has no knowledge and did not authorize such. A bank (in
this case PCIB) which cashes a check drawn upon another bank (in this case Citibank),
without requiring proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party. Hence, PCIB is liable for the
amount of the embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within the
course and apparent scope of their employment or authority. Hence, PCIB is liable for the
fraudulent act of its employee who set up the savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the performance of its obligations with
respect to its agreement with Ford. The checks which were drawn against Fords account
with Citibank clearly states that they are payable to the CIR only yet Citibank delivered said
payments to PCIB. Citibank however argues that the checks were indorsed by PCIB to
Citibank and that the latter has nothing to do but to pay it. The Supreme Court cited Section
62 of the Negotiable Instruments Law which mandates the Citibank, as an acceptor of the
checks, to engage in paying the checks according to the tenor of the acceptance which is to
deliver the payment to the payees account only.
But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not
the only negligent parties. Ford is also negligent for failing to examine its passbook in a timely
manner which could have avoided further loss. But this negligence is not the proximate cause
of the loss but is merely contributory. Nevertheless, this mitigates the liability of PCIB and
Citibank hence the rate of interest, with which PCIB and Citibank is to pay Ford, is lowered
from 12% to 6% per annum.

2. PAULINO GULLAS V. PNB (G.R. NO. L-43191)

Facts:
Petitioner Gullas maintains a current account with herein respondent PNB. He together with
one Pedro Lopez signed as endorsers of a Warrant issued by the US Veterans Bureau
payable to the order of one Francisco Bacos. PNB cashed the check but was subsequently
dishonored by the Insular Treasurer. PNB then sent notices to petitioner which could not be
delivered to him at the time because he was in Manila. PNB in the letter informed the petitioner
the outstanding balance on his account was applied to the part payment of the dishonored
check. Upon petitioners return, he received the notice of dishonor and immediately paid the
unpaid balance of the warrant. As a consequence of these, petitioner was inconvenienced
when his insurance was not paid due to lack of funds and was publicized widely at his area
to his mortification.
Issue:
Whether or not PNB has the right to apply petitioners deposit to his debt to the bank.
Ruling: NO.
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of
any indebtedness to it on the part of a depositor. The Civil Code contains provisions regarding
compensation (set off) and deposit. The portions of Philippine law provide that compensation
shall take place when two persons are reciprocally creditor and debtor of each other. In this
connection, it has been held that the relation existing between a depositor and a bank is that
of creditor and debtor. [General Rule]
Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly.
The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without
waiting for any action by Gullas, the bank made use of the money standing in his account to
make good for the treasury warrant.
Gullas was merely an indorser and had issued in good faith. As to an indorser, the situation
is different and notice should actually have been given him in order that he might protect his
interests. We accordingly are of the opinion that the action of the bank was prejudicial to
Gullas.

3. REYNALDO P. FLOIRENDO, JR. vs. METROPOLITAN BANK and TRUST

COMPANY

FACTS:

Reynaldo P. Floirendo, Jr., petitioner, is the president and chairman of the Board of
Directors of Reymill Realty Corporation, a domestic corporation engaged in real estate
business. He obtained a loan ofP1,000,000.00 from the Metropolitan Bank and Trust
Company for the additional working capital for his company. As security, he executed a real
estate mortgage over his four (4) parcels of land.

Petitioner signed a promissory note fixing the rate of interest at "15.446% per annum for the
first 30 days, subject to upward/downward adjustment every 30 days thereafter"; and a
penalty charge of 18% per annum "based on any unpaid principal to be computed from date
of default until payment of the obligation."

The bank started imposing higher interest rates on petitioners loan which varied through
the months and as a result, petitioner could no longer pay the high interest rates charged by
the bank. Thus, he negotiated for the renewal of his loan. Respondent bank agreed
provided petitioner would pay the arrears in interest. Despite payment by petitioner, the
bank, instead of renewing the loan, filed a petition for foreclosure of mortgage which was
granted.

Referring to the real estate mortgage and the promissory note as "contracts of adhesion,"
petitioner alleged that the increased interest rates unilaterally imposed by respondent bank
are scandalous, immoral, illegal and unconscionable. He also alleged that the terms and
conditions of the real estate mortgage and the promissory note are such that they could be
interpreted by respondent bank in whatever manner it wants, leaving petitioner at its mercy.
Petitioner thus prayed for reformation of these documents and the issuance of a temporary
restraining order (TRO) and a writ of preliminary injunction to enjoin the foreclosure and
sale at public auction of his four (4) parcels of land.

The bank asserted that the interest stipulated by the parties in the promissory note is
not per annum but on a month to month basis. That the interest appearing therein was good
only for the first 30 days of the loan, subject to upward and downward adjustment every 30
days thereafter. The terms of the real estate mortgage and promissory note voluntarily
entered into by petitioner are clear and unequivocal. There is, therefore, no legal and factual
basis for an action for reformation of instruments.

The RTC dismissed the complaint for reformation of instruments, dissolved the writ of
preliminary injunction and directed the sale at public auction of petitioners mortgaged
properties.
The court was convinced that there was certainly a meeting of the minds between the
parties. Plaintiff and defendant bank entered into a contract of loan, the terms and
conditions of which, especially on the rates of interest, are clearly and unequivocally spelled
out in the promissory note. The court believes that there was absolutely no mistake, fraud or
anything that could have prevented a meeting of the minds between the parties.

ISSUE:

Whether or not the mortgage contract and the promissory note express the true agreement
between the parties herein?

HELD: NO

FALLO:

The SC hold that the increases of interest rate unilaterally imposed by respondent bank
without petitioners assent are violative of the principle of mutuality of contracts ordained in
Article 1308 of the Civil Code which provides:

Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

The binding effect of any agreement between the parties to a contract is premised on two
settled principles: (1) that obligations arising from contracts have the force of law between
the contracting parties; and (2) that there must be mutuality between the parties based on
their essential equality to which is repugnant to have one party bound by the contract
leaving the other free therefrom. Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of
the parties is likewise invalid.

The provision in the promissory note authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest and/or bank charges "without
advance notice" to petitioner, "in the event of change in the interest rate prescribed by law
or the Monetary Board of the Central Bank of the Philippines," does not give respondent
bank unrestrained freedom to charge any rate other than that which was agreed upon.
Here, the monthly upward/downward adjustment of interest rate is left to the will of
respondent bank alone. It violates the essence of mutuality of the contract.

Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.
Under Article 1310 of the Civil Code, courts are granted authority to reduce/increase
interest rates equitably, thus:

Article 1310. The determination shall not be obligatory if it is evidently inequitable. In

such case, the courts shall decide what is equitable under the circumstances.

In this case, respondent bank started to increase the agreed interest rate of 15.446% per
annum to 24.5% on July 11, 1997 and every month thereafter; 27% on August 11, 1997;
26% on September 10, 1997; 33% on October 15, 1997; 26.5% on November 27, 1997;
27% on December 1997; 29% on January 13, 1998; 30.244% on February 7, 1998; 24.49%
on March 9, 1998; 22.9% on April 18, 1998; and 18% on May 21, 1998. Obviously, the rate
increases are excessive and arbitrary. It bears reiterating that respondent bank unilaterally
increased the interest rate without petitioners knowledge and consent.

The petitioner negotiated for the renewal of his loan and he paid the interests due.
Respondent bank then could not claim that there was no attempt on his part to comply with
his obligation. Yet, respondent bank hastily filed a petition to foreclose the mortgage to gain
in taking petitioners parcels of land at bargain prices. Obviously, respondent bank acted in
bad faith.

In sum, we find that the requisites for reformation of the mortgage contract and promissory
note are present in this case. There has been meeting of minds of the parties upon these
documents. However, these documents do not express the parties true agreement on
interest rates. And the failure of these documents to express their agreement on interest
rates was due to respondent banks inequitable conduct.

Henceforth, the SC GRANTED the petition. The interest he paid in excess of 15.446%
should be applied to the payment of the principal obligation.