Cagungun vs. Planters Development Bank

A bank is bound to observe a degree of diligence higher than that of a good father of a family; its gross negligence in handling a depositor’s account amounts to bad faith and justifies moral damages. However, evidence not alleged in the pleadings and objected to at trial cannot be considered unless the pleadings are amended, so the unpaid loan remains; but foreclosure may be enjoined where the bank’s own unauthorized withdrawals exceeded the loan.

The Cagungun spouses had diverse business interests in Olongapo City and were among the first customers of Country Development Bank when it opened an extension office there. They maintained savings accounts with the bank and, because their businesses required daily deposits, entrusted their passbooks and funds to bank personnel. The dispute arose after the bank demanded payment of a past-due loan, prompting petitioners to investigate and discover unauthorized withdrawals from their accounts. Country Development Bank later merged into Planters Development Bank.

Vicente Cagungun and Lapreciosisima Cagungun had diverse business interests in Olongapo City and were among the first customers of Country Development Bank when it opened an extension office there. They opened accounts and were issued Savings Passbook No. 12241-16 in the name of Puring’s Dry Goods and Savings Passbook No. 38470-29 in the names of V/L Cagungun. Because their businesses required daily deposits, they entrusted and left their savings passbooks with COUNTRY and its personnel; at least once a day Branch Manager Ruperto Reyes or a certain Bong and Ding would get their funds, with the agreement that the amounts would be rounded off and deposited to their account while the odd remainder would be applied to their loan.

The arrangement apparently went well until March 1981, when the Cagungun spouses received a letter from COUNTRY telling them that their loan was past due and demanding payment. This prompted them to investigate, but the investigation was tedious and difficult because of lack of cooperation and even resistance from COUNTRY. With help from friends in high places, they accessed information that in 1979, on October 8, 18, 20 and 31, November 15, and December 4 and 8, a total of P220,000.00 was withdrawn from Savings Passbook No. 12241-16 using withdrawal slips. These withdrawals were invalid because no such withdrawal was authorized, made, or received by the depositors, and the signatures of Vicente Cagungun on the slips were forgeries. Arcadio Ramos, Chief of the Questioned Documents Division of the NBI, confirmed this upon examination.

PLANTERS’ employees Internal Auditor Lilia Tactay, Branch Manager Lolita Mendoza, and Cashier Bella Lumanog explained that the withdrawal of P20,000.00 made on October 8, 1979 from Savings Account No. 12241-16 and withdrawals totaling P30,000.00 from several other accounts of the spouses were placed on time deposits on the same date by Vicente Cagungun in five accounts held with their children. The other withdrawals from Savings Account No. 12241-16 were made by Vicente Cagungun in exchange for Manager’s Checks made in the names of payees Santiago Lee, Rosita Saldana, Benito Yap, and Joaquin Aganda.

The lower court ruled that the withdrawals from Savings Account No. 12241-16 through seven withdrawal slips amounting to P220,000.00 were not made by petitioners, as the alleged signatures of Vicente Cagungun, Jr. appearing therein were falsified, as confirmed by NBI Handwriting Expert Arcadio Ramos. It likewise considered petitioners to have paid their mortgage loan of P58,297.16 because they instructed respondent to apply their funds in Savings Account No. 38470-29 thereto, which were adequate for that purpose. For not applying the savings to the loan, causing the threatened foreclosure of the real estate mortgage over their house and lot, and for allowing unauthorized withdrawals through falsified withdrawal slips, the lower court held respondent liable for moral damages. For ignoring two demand letters of petitioners, the demand letter of petitioners’ counsel, and representations made by Pampanga Gov. Estelito Mendoza and Central Bank Governor Jaime Laya, and for attempting to cover up the misdeeds of its employees constituting malice and bad faith, respondent was ordered to pay exemplary damages, attorney’s fees, and costs.

In its decision dated 26 June 1997, the RTC enjoined foreclosure, ordered payment of P220,000.00 actual damages plus 12% interest per annum from filing until fully paid, considered the mortgaged account of P58,297.16 paid, and awarded P300,000.00 moral damages, P300,000.00 exemplary damages, P50,000.00 litigation expense, P50,000.00 attorney’s fees, plus costs. Respondent appealed to the CA. The CA agreed that money was withdrawn from petitioners’ deposits without their authority or knowledge and that this was done by one or some of respondent’s personnel, but held that petitioners were not free from the obligation to pay the admitted loan of P58,297.16 because, although it was not paid due to respondent’s failure to comply with the instruction to apply the remainder of the sums deposited to their loan, it remained an unpaid obligation. The CA removed the awards for moral and exemplary damages and reduced the awards for attorney’s fees and litigation expenses. It promulgated its decision on 25 March 2002, affirming the appealed decision with modifications: deleting the dispositions deeming the mortgaged loan paid and enjoining foreclosure, deleting moral and exemplary damages, and reducing litigation fees and expenses to a combined P30,000.00. Petitioners’ motion for reconsideration was denied in a resolution dated 06 June 2003. Petitioners then filed the present Petition for Review on Certiorari under Rule 45.

• Petitioners argued that the CA erred in removing the award of moral damages, citing settled jurisprudence that moral damages should be awarded when the injured party suffers mental anguish and serious anxiety.
• They claimed they suffered torment from the time they noticed their deposits were not properly recorded until they received respondent’s letter threatening foreclosure of their residential house and lot for a loan of P58,000.00.
• They narrated that respondent bank refused to give them copies of the ledgers of their deposits and copies of the withdrawal slips despite the intercession of Pampanga Governor Estelito Mendoza and Central Bank Governor Jaime Laya; only after the Chief of the Criminal Investigation Service of the Philippine Constabulary sent two investigators did they receive copies.
• They discovered that P220,000.00 was withdrawn from their accounts by respondent bank through its employees by falsifying the signatures of Vicente Cagungun, Jr. in seven withdrawal slips.
• They insisted that respondent, in allowing withdrawals in their savings account without their authority or knowledge, is guilty of gross negligence and liable for moral damages.
• Petitioners also assailed the CA for deleting the portions of the RTC decision declaring their mortgage loan paid and enjoining foreclosure. They insisted they proved that P30,000.00 and P118,000.00 were respectively withdrawn from Savings Account No. 38470-29 and No. 12241-16 and were not applied as payment for their loan; adding these amounts, the sum was sufficient to pay their loan and discharge the real estate mortgage.
• They also assailed the CA’s deletion of exemplary damages and reduction of litigation fees and expenses.

• Respondent maintained that the CA was correct in deleting the award of moral damages.
• It argued that it should not be faulted if petitioners had to experience inconveniences in acquiring copies of ledgers and withdrawal slips since certain banking procedures must be observed.
• It faulted petitioners for not strictly observing security rules of financial institutions in the care and custody of their passbooks, as well as in the standard operating procedure for deposits and withdrawals, which led to the alleged improper recording of deposits and the alleged losses.
• It stressed that passbooks should be securely kept by the owner, but petitioners openly entrusted their passbooks to other people, leaving them unable to monitor their transactions.
• It added that there was absence of any actual injury on the part of petitioners.
• It asserted that it neither acted in bad faith nor took advantage of petitioners’ deposit for its use and benefit.
• It claimed that petitioners failed to establish fraud on the part of respondent bank as to make it liable for the alleged improper recording of deposits.
• It claimed that petitioners failed to present in court the persons Bong or Ding to whom they entrusted their money for deposit and to prove that Ruperto Reyes, then Officer-In-Charge of the Extension Office of Country Development Bank, defrauded them by facilitating withdrawals for the benefit of the bank.
• It insisted that it was the negligence of petitioners, not fraud on its part, which was the reason that petitioners’ deposits were not applied in accordance with their intentions, resulting in the threatened foreclosure of their mortgaged property.
• On the evidence of P30,000.00 and P118,000.00 withdrawals, respondent objected and attempted to have the testimony stricken off the record on the ground of allegata et probata.

• Moral Damages: Whether the CA erred in deleting the RTC’s award of moral damages.
• Exemplary Damages: Whether the CA erred in deleting the RTC’s award of exemplary damages.
• Attorney’s Fees and Litigation Expenses: Whether the CA erred in reducing the awards of attorney’s fees and litigation expenses.
• Mortgaged Loan / Allegata et Probata: Whether the CA erred in deleting the RTC’s declaration that the mortgaged loan was paid, and whether evidence of P30,000.00 and P118,000.00 withdrawals not alleged in the complaint may be considered.
• Foreclosure: Whether the CA erred in deleting the injunction against foreclosure.

• Moral Damages: Yes. The CA erred in deleting the award. Gross negligence of a bank in handling its client’s deposit amounts to bad faith that calls for an award of moral damages. The SC found P100,000.00 reasonable.
• Exemplary Damages: Yes. The CA erred in deleting the award. The law allows exemplary damages to set an example for the public good, and the award was warranted by the bank’s failure to prevent unauthorized withdrawals and to properly apply deposits. The SC reduced the amount to P50,000.00.
• Attorney’s Fees and Litigation Expenses: Partly. The award is proper, but the amounts were modified. The SC awarded P25,000.00 as attorney’s fees and P25,000.00 for litigation expenses.
• Mortgaged Loan / Allegata et Probata: No as to the declaration that the loan was paid. The evidence on P30,000.00 and P118,000.00 withdrawals was not alleged in the complaint and was objected to on the ground of allegata et probata; no amendment was made, so the evidence cannot be considered. The outstanding loan of P58,297.16 remains unpaid, but payment thereof shall be deducted from the damages awarded.
• Foreclosure: Yes. The CA erred in deleting the injunction. Respondent cannot exercise its right to foreclose under the circumstances; it would be the height of inequity to allow foreclosure because the P220,000.00 illegally withdrawn was more than sufficient to pay the loan had it not been illegally withdrawn.

• Moral Damages:

  • The SC agreed with the findings of the two courts below that the unauthorized transactions were committed by one or some of the employees of respondent bank, for which the bank should be liable.
  • The evidence showed that respondent did not exercise the degree of diligence it ought to have exercised in dealing with its clients — diligence higher than that of a good father of a family. If respondent had exercised such diligence, no anomaly or irregularity would have happened.
  • In Philippine National Bank v. Pike, the SC discussed the degree of diligence imposed on banks: with banks, the degree of diligence required is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. The law imposes on banks a high degree of obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of banking.
  • Section 2 of Republic Act No. 8791, which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” Though passed long after the unauthorized withdrawals, the provision is a statutory affirmation of Supreme Court decisions already in esse at the time of such withdrawals.
  • In Simex International, Inc. v. Court of Appeals, the SC elucidated that “the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.”
  • In The Consolidated Bank and Trust Corporation v. Court of Appeals, the SC clarified that said fiduciary relationship means that the bank’s obligation to observe “highest standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family.
  • Article 1172 of the New Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a family. In every case, the depositor expects the bank to treat his account with utmost fidelity, whether such accounts consist only of a few hundred pesos or of millions of pesos.
  • Settled is the rule that gross negligence of a bank in the handling of its client’s deposit amounts to bad faith that calls for an award of moral damages. Moral damages are meant to compensate the claimant for any physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injuries unjustly caused.
  • The failure of the bank to prevent seven unauthorized withdrawals from the deposits of petitioners and its non-compliance with petitioners’ instructions regarding the loan payments constitute gross negligence which justifies the award of moral damages. As employer, respondent is liable for the negligence or misdeed of its employees which caused petitioners to have sleepless nights thinking about the threatened foreclosure of their house and lot.
  • The way respondent gave petitioners a hard time in securing copies of their withdrawal slips and ledgers of their deposits is an indication of bad faith. Respondent could have easily cooperated with petitioners by immediately furnishing the latter with documents they wanted. Written communications from petitioners’ lawyers and from the Central Bank Governor were not sufficient; it was only after two agents of the CIS of the Philippine Constabulary went to the bank that respondent was obliged to give petitioners what they were asking for.
  • In culpa contractual or breach of contract, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations.
  • The requisites for award of moral damages require: firstly, evidence of besmirched reputation or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Article 2219 and Article 2220 of the Civil Code. All these elements are present.
  • There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. The SC found the sum of P300,000.00 awarded by the lower courts excessive and reduced it to P100,000.00.

• Exemplary Damages:

  • The law allows the grant of exemplary damages to set an example for the public good.
  • The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained a ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of all, confidence.
  • For this reason, banks should guard against injury attributable to negligence or bad faith on its part.
  • The award of exemplary damages is warranted by the failure of respondent bank to prevent the unauthorized withdrawals from petitioners’ deposits and its failure to properly apply the latter’s deposits to their loan. The SC found the P300,000.00 awarded by the lower court excessive and reduced it to P50,000.00.

• Attorney’s Fees and Litigation Expenses:

  • It is settled that the reasons or grounds for the award of attorney’s fees and expenses of litigation must be set forth in the decision of the court.
  • An award of attorney’s fees, being an exception from the policy of not putting a premium or a penalty on the right to litigate, has since been limited to the grounds specified by law. Article 2208 of the Civil Code enumerates the instances where attorney’s fees and expenses of litigation can be recovered.
  • The RTC clearly stated in its decision that petitioners are entitled to attorney’s fees and litigation expenses because they were compelled to litigate in order to protect their interest. The SC agreed.
  • There being an award for exemplary damages, it follows that there should be an award of attorney’s fees and litigation expenses.
  • However, the awards of P50,000.00 for attorney’s fees and P50,000.00 for litigation expenses by the RTC are too much, while the award of P30,000.00 of the CA for both is too small. Inasmuch as this case has been pending for more than twenty (20) years, the award of P25,000.00 for each will be sufficient.

• Mortgaged Loan / Allegata et Probata:

  • Petitioners claimed that the CA erred in deleting the portions of the RTC decision declaring their mortgage loan paid and enjoining foreclosure. They insisted that they were able to prove that P30,000.00 and P118,000.00 were respectively withdrawn from Savings Account No. 38470-29 and No. 12241-16 and that same were not applied as payment for their loan. They maintained that by adding together said amounts, the sum thereof is sufficient to pay their loan and to consider the real estate mortgage as discharged.
  • Looking at the complaint filed by petitioners, there is no allegation that said amounts were withdrawn from their accounts and that same were not applied as payments for their loan. Petitioners likewise did not ask in their prayer that said amounts be returned to them or that they be used to off-set their indebtedness to respondent.
  • When petitioners tried to prove this allegation, counsel for respondent objected and attempted to have the testimony thereon stricken off the record on the ground of allegata et probata.
  • Under Section 5, Rule 10 of the Revised Rules of Court, if evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the Court may allow the pleadings to be amended freely when the presentation of the merits of the action will be subserved thereby and the admission of such evidence would not prejudice the objecting party in maintaining his action or defense upon the merit.
  • It is thus clear that when there is an objection on the evidence presented because it is not within the issues made by the pleadings, an amendment must be made before accepting such evidence. If no amendment is made, the evidence objected to cannot be considered.
  • In the case before us, the trial court, there being an objection on the evidence being presented by respondent, failed to order the amendment of the complaint. Thus, the SC was constrained not to consider evidence regarding the P30,000.00 and P118,000.00 allegedly withdrawn from their accounts. With this ruling, it follows that the outstanding loan of petitioners in the amount of P58,297.16 remains unpaid.

• Foreclosure:

  • As regards respondent’s right to exercise its right to foreclosure of the real estate mortgage on petitioners’ property, the SC ruled that respondent cannot exercise such right under the circumstances obtaining. It will be the height of inequity if the SC allowed such a thing.
  • The evidence is clear that the sum of P220,000.00 was withdrawn from petitioners’ deposits without their knowledge and authority. This amount is more than sufficient to pay for the loan had it not been illegally withdrawn.
  • Neither should petitioners be held liable for any interest on the remaining balance of the loan considering that they could have easily settled their obligation with respondent if they were not embroiled in the anomaly caused by respondent’s employees.
  • Finally, payment for the remaining balance of the loan amounting to P58,297.16 should be deducted from the actual damages awarded by the court.

• Fiduciary nature of banking / higher degree of diligence — Banks must treat the accounts of depositors with meticulous care, always having in mind the fiduciary nature of banking. The degree of diligence required is more than that of a good father of a family. This is affirmed by Section 2 of Republic Act No. 8791 and Article 1172 of the New Civil Code. Applied: respondent bank failed to prevent unauthorized withdrawals and failed to comply with petitioners’ instruction to apply deposits to their loan.
• Gross negligence of a bank amounts to bad faith for moral damages — Gross negligence of a bank in the handling of its client’s deposit amounts to bad faith that calls for an award of moral damages. Applied: the bank allowed seven unauthorized withdrawals through falsified withdrawal slips and did not apply deposits to the loan, causing petitioners mental anguish and serious anxiety.
• Requisites for moral damages in culpa contractual — (1) evidence of besmirched reputation or physical, mental or psychological suffering sustained by the claimant; (2) a culpable act or omission factually established; (3) proof that the wrongful act or omission is the proximate cause of the damages; and (4) the case is predicated on any of the instances in Article 2219 and Article 2220 of the Civil Code. Applied: all requisites were present.
• Exemplary damages for public good — Exemplary damages are allowed to set an example for the public good. Banks, as indispensable institutions imbued with public interest, should guard against injury attributable to negligence or bad faith. Applied: award warranted by the bank’s failure to prevent unauthorized withdrawals and to apply deposits to the loan.
• Attorney’s fees and litigation expenses — Attorney’s fees and expenses of litigation are exceptions to the policy of not putting a premium or penalty on the right to litigate and must be based on the grounds specified by law, particularly Article 2208 of the Civil Code. The reasons must be set forth in the decision. Applied: petitioners were compelled to litigate to protect their interest, and exemplary damages were awarded; amounts reduced to P25,000.00 each.
• Allegata et probata — Only matters alleged in the pleadings may be proved. If evidence is objected to at trial on the ground that it is not within the issues made by the pleadings, an amendment must be made before accepting such evidence; if no amendment is made, the evidence objected to cannot be considered. Applied: evidence of P30,000.00 and P118,000.00 withdrawals was not considered because it was not alleged in the complaint and was objected to.
• Amendment to conform to evidence under Section 5, Rule 10 — When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated as if raised in the pleadings. If evidence is objected to on the ground that it is not within the issues, the court may allow amendment freely when the presentation of the merits will be subserved and the objecting party fails to show prejudice. Applied: the trial court failed to order amendment, so the objected evidence was excluded.

• “With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions.”
• “Settled is the rule that gross negligence of a bank in the handling of its client’s deposit amounts to bad faith that calls for an award of moral damages.”
• “If no amendment is made, the evidence objected to cannot be considered.”
• “It will be the height of inequity if we allow such a thing. The evidence is clear that the sum of P220,000.00 was withdrawn from petitioners’ deposits without their knowledge and authority. This amount is more than sufficient to pay for the loan had it not been illegally withdrawn.”

• Philippine National Bank v. Pike, G.R. No. 157845, 20 September 2005 — Cited for the degree of diligence required of banks: more than that of a good father of a family; banking is imbued with public interest; fiduciary nature.
• Simex International, Inc. v. Court of Appeals — Cited for the bank’s obligation to treat depositors’ accounts with meticulous care, always having in mind the fiduciary nature of the relationship.
• The Consolidated Bank and Trust Corporation v. Court of Appeals — Cited for the rule that the fiduciary relationship means the bank’s obligation to observe “highest standards of integrity and performance” is deemed written into every deposit agreement.
• Samson, Jr. v. Bank of the Philippine Islands, G.R. No. 150487, 10 July 2003, 405 SCRA 607 — Cited for moral damages.
• Philippine Telegraph & Telephone Corporation v. Court of Appeals, G.R. No. 139268, 03 September 2002, 388 SCRA 270 — Cited for moral damages requisites and culpa contractual.
• Citytrust Banking Corporation (now Bank of the Philippine Islands) v. Villanueva, G.R. No. 141011, 19 July 2001, 361 SCRA 446 — Cited for moral damages.
• Prudential Bank v. Court of Appeals, G.R. No. 125536, 16 March 2000, 328 SCRA 264 — Cited for moral and exemplary damages.
• Philippine National Bank v. Court of Appeals, G.R. No. 126152, 28 September 1999, 315 SCRA 309 — Cited for moral damages.
• Philippine Banking Corporation v. Court of Appeals, G.R. No. 127469, 15 January 2004, 419 SCRA 487 — Cited for moral damages.
• Bautista v. Mangaldan Rural Bank, Inc., G.R. No. 100755, 10 February 1994, 230 SCRA 16 — Cited for the role of banks and public confidence.
• Solidbank Corporation v. Arrieta, G.R. No. 152720, 17 February 2005, 451 SCRA 711, 722 — Cited for the rule that banks should guard against injury attributable to negligence or bad faith.
• Cipriano v. Court of Appeals, G.R. No. 107968, 30 October 1996, 263 SCRA 711 — Cited for the requirement that grounds for attorney’s fees be set forth in the decision.
• Olan v. Court of Appeals, G.R. No. 126848, 12 March 1998, 287 SCRA 504 — Cited for the rule that attorney’s fees are limited to grounds specified by law.
• Robles v. Del Rosario, 100 Phil. 891 — Cited for the rule of allegata et probata: only matters alleged in the pleadings may be proved.

• Section 2, Republic Act No. 8791 — Declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. Applied as a statutory affirmation of Supreme Court decisions already in esse at the time of the unauthorized withdrawals.
• Article 1172, New Civil Code — Provides that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation, the diligence of a family. Applied: banks are required to observe a degree of diligence higher than that of a good father of a family.
• Article 1980, New Civil Code — Provides that savings deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Applied: the relationship between a bank and its depositor is that of debtor-creditor.
• Article 2219, New Civil Code — Enumerates the cases where moral damages may be recovered. Applied: the case falls under the instances expressed or envisioned by Article 2219.
• Article 2220, New Civil Code — Provides that willful injury to property may be a legal ground for awarding moral damages, and the same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Applied: the bank’s gross negligence amounted to bad faith.
• Article 2208, New Civil Code — Enumerates the instances where attorney’s fees and expenses of litigation can be recovered. Applied: petitioners were compelled to litigate to protect their interest, and exemplary damages were awarded.
• Section 5, Rule 10, 1997 Rules of Civil Procedure — Governs amendment to conform to or authorize presentation of evidence. Applied: because respondent objected to evidence not within the issues and no amendment was made, the evidence could not be considered.

• Puno (Chairman), Callejo, Sr., and Tinga, JJ., concur.
• Austria-Martinez, J., no part.

• None.