Central Bank of the Philippines vs. Citytrust Banking Corporation

A bank that fails to verify the signature of a depositor’s authorized representative is negligent, but the depositor’s contributory negligence—such as delay in examining its account, cancelling the checks, and notifying the bank of their loss—mitigates the bank’s liability under Article 2179 of the Civil Code and warrants an allocation of the loss between them.

Pursuant to Republic Act No. 625, the old Central Bank Law, Citytrust Banking Corporation, formerly Feati Bank, maintained a demand deposit account with the Central Bank of the Philippines, now Bangko Sentral ng Pilipinas. Citytrust furnished Central Bank with the names and corresponding signatures of five officers authorized to sign checks and serve as drawers and indorsers for its account, as well as the list and signatures of its roving tellers authorized to withdraw, sign receipts, and perform other transactions on its behalf. Central Bank later issued security identification cards to the roving tellers, one of whom was Rounceval Flores.

Citytrust Banking Corporation, formerly Feati Bank, maintained a demand deposit account with the Central Bank of the Philippines pursuant to Republic Act No. 625. It furnished Central Bank with the names and corresponding signatures of five officers authorized to sign checks and serve as drawers and indorsers for its account, and with the list and corresponding signatures of its roving tellers authorized to withdraw, sign receipts, and perform other transactions on its behalf. Central Bank later issued security identification cards to the roving tellers, one of whom was Rounceval Flores.

On July 15, 1977, Flores presented for payment to Central Bank’s Senior Teller Iluminada dela Cruz two Citytrust checks of even date, payable to Citytrust, one in the amount of ₱850,000 and the other in the amount of ₱900,000, both signed and indorsed by Citytrust’s authorized signatory-drawers. After the checks were certified by Central Bank’s Accounting Department, Iluminada verified them, prepared the cash transfer slip on which she affixed her signature, stamped the checks with the notation “Received Payment,” and asked Flores to sign on the space above such notation. Instead of signing his name, Flores signed as “Rosauro C. Cayabyab,” a fact Iluminada failed to notice.

Iluminada thereupon sent the cash transfer slip and checks to Central Bank’s Cash Department, where an officer verified and compared the drawers’ signatures on the checks against their specimen signatures provided by Citytrust. Finding the signatures in order, the officer approved the cash transfer slip and paid the corresponding amounts to Flores. Central Bank then debited the total amount of ₱1,750,000 from Citytrust’s demand deposit account.

More than a year and nine months later, Citytrust, by letter dated April 23, 1979, alleged that the checks were already cancelled because they were stolen and demanded that Central Bank restore the amounts covered thereby to its demand deposit account. Central Bank did not heed the demand. Citytrust later filed a complaint for estafa, with reservation on the filing of a separate civil action, against Flores. Flores was convicted.

Citytrust thereafter filed before the Regional Trial Court of Manila a complaint for recovery of sum of money with damages against Central Bank, alleging that Central Bank erred in encashing the checks and in charging the proceeds thereof to its account despite the lack of authority of “Rosauro C. Cayabyab.” The trial court found both Citytrust and Central Bank negligent and held them equally liable for the loss. The Court of Appeals likewise found that both parties contributed equally to the fraudulent encashment, noting that Citytrust failed to take adequate precautionary measures to prevent the fraudulent encashment and that Central Bank was not entirely blame-free in light of its failure to verify the signature of Citytrust’s agent authorized to receive payment.

• Authority of Flores: Petitioner maintained that Flores having been an authorized roving teller, Citytrust is bound by his acts.
• Absence of Negligence: Petitioner maintained that it was not negligent in releasing the proceeds of the checks to Flores; the failure of its teller to properly verify his signature notwithstanding, petitioner contended that verification could be dispensed with because Flores was known to be an authorized roving teller of Citytrust who had had numerous transactions with petitioner on Citytrust’s behalf for five years prior to the questioned transaction.
• Citytrust’s Sole Negligence: Petitioner attributed negligence solely to Citytrust for allowing Flores to steal the checks and failing to timely cancel them; allowing Flores to wear the identification card issued by petitioner; failing to report Flores’ absence from work on the day of the incident; and failing to explain the circumstances surrounding the supposed theft and cancellation of the checks.
• Proximate Cause and Delay: Petitioner argued that, assuming its teller was negligent, Citytrust’s negligence, which preceded that committed by the teller, was the proximate cause of the loss or fraud, drawing attention to Citytrust’s considerable delay in demanding the restoration of the proceeds of the checks.
• Capacity to be Sued: Petitioner contended that it cannot be sued; the Court of Appeals brushed this aside, holding that petitioner’s Charter specifically clothes it with the power to sue and be sued.
• Reservation of Civil Action: Petitioner asserted that Citytrust’s reservation of the filing of a separate civil action against Flores precluded Citytrust from filing the civil action against it; the Court of Appeals held that the action for the recovery of sum of money is separate and distinct and is grounded on a separate cause of action from that of the criminal case for estafa.

• Lack of Authority: Citytrust alleged that petitioner Central Bank erred in encashing the checks and in charging the proceeds thereof to its account despite the lack of authority of “Rosauro C. Cayabyab.”

• Negligence of Central Bank: Whether petitioner Central Bank was negligent in encashing the checks and charging the proceeds to Citytrust’s account despite its teller’s failure to verify the signature of the person receiving payment.
• Contributory Negligence of Citytrust: Whether Citytrust’s failure to timely examine its account, cancel the checks, and notify petitioner of their alleged loss or theft constituted contributory negligence that mitigates petitioner’s liability.
• Allocation of Loss: Whether the loss should be borne equally by the parties or allocated on a 60-40 ratio under Article 2179 of the Civil Code.

• Negligence of Central Bank: Yes. Central Bank’s teller failed to verify Flores’ signature; the fact of prior transactions did not excuse verification. Banks are bound to observe high standards of diligence due to the fiduciary nature of banking.
• Contributory Negligence of Citytrust: Yes. Citytrust’s failure to timely examine its account, cancel the checks, and notify petitioner of the loss or theft was contributory negligence that mitigates Central Bank’s liability under Article 2179.
• Allocation of Loss: 60-40 ratio. The Court affirmed the Court of Appeals Decision with modification, allocating the loss between petitioner and Citytrust on a 60-40 ratio, in line with Consolidated Bank.

• Negligence of Central Bank: The Court found that Central Bank’s teller Iluminada did not verify Flores’ signature on the flimsy excuse that Flores had had previous transactions with Central Bank for a number of years. That circumstance did not excuse the teller from focusing attention to or at least glancing at Flores as he was signing, and from satisfying herself that the signature he had just affixed matched his specimen signature. Had she done that, she would have readily been put on notice that Flores was affixing, not his but a fictitious signature. Because petitioner is the government body mandated to supervise and regulate banking and other financial institutions, the ruling in Consolidated Bank and Trust Corporation vs. Court of Appeals applies: the contract between the bank and its depositor is governed by the Civil Code on simple loan; there is a debtor-creditor relationship, with the bank as debtor and the depositor as creditor; the law imposes on banks high standards in view of the fiduciary nature of banking; Section 2 of Republic Act No. 8791 declares that the State recognizes the fiduciary nature of banking requiring high standards of integrity and performance; this is a statutory affirmation of Supreme Court decisions starting with Simex International vs. Court of Appeals, holding that the bank is under obligation to treat the accounts of its depositors with meticulous care; the fiduciary relationship means that the bank’s obligation to observe high standards of integrity and performance is deemed written into every deposit agreement; banks must assume a degree of diligence higher than that of a good father of a family; Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation, the diligence of a good father of a family; Section 2 of Republic Act No. 8791 prescribes the statutory diligence required from banks. Although Republic Act No. 8791 took effect after the transaction, jurisprudence at the time already imposed the same high standard of diligence. Thus, Central Bank was negligent.
• Contributory Negligence of Citytrust: Citytrust’s failure to timely examine its account, cancel the checks, and notify petitioner of their alleged loss or theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code. Article 2179 provides that if the plaintiff’s 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 courts shall mitigate the damages to be awarded. Had Citytrust timely discovered the loss or theft and/or subsequent encashment, the proceeds or part thereof could have been recovered. Its negligence was therefore contributory and mitigated Central Bank’s liability.
• Allocation of Loss: In line with the ruling in Consolidated Bank, the Court deemed it proper to allocate the loss between petitioner and Citytrust on a 60-40 ratio. The Court of Appeals had affirmed the trial court’s equal liability under Article 2179 vis-à-vis Article 1172, but the Supreme Court modified the allocation to reflect Citytrust’s contributory negligence.

• Fiduciary nature of banking and high standards of diligence — The law imposes on banks high standards because of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 declares that the State recognizes the fiduciary nature of banking requiring high standards of integrity and performance. This obligation is deemed written into every deposit agreement between a bank and its depositor. Banks must assume a degree of diligence higher than that of a good father of a family. In this case, Central Bank, as the government body mandated to supervise and regulate banking and other financial institutions and as depository of Citytrust’s demand deposit, was required to observe high standards; its teller’s failure to verify Flores’ signature breached that duty.
• Bank-depositor relationship as simple loan — Under Article 1980 of the Civil Code, savings and deposits of money in banks and similar institutions are governed by the provisions on simple loan. There is a debtor-creditor relationship between the bank and its depositor: the bank is the debtor and the depositor is the creditor. The deposit agreement determines the rights and obligations of the parties. In this case, the relationship between Central Bank and Citytrust was governed by the deposit agreement and the Civil Code provisions on simple loan, subject to the high standards imposed on banks.
• Contributory negligence and mitigation of damages — Under Article 2179 of the Civil Code, if the plaintiff’s 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 courts shall mitigate the damages to be awarded. In this case, Citytrust’s failure to timely examine its account, cancel the checks, and notify petitioner of their alleged loss or theft was contributory negligence that mitigated Central Bank’s liability and warranted a 60-40 allocation of the loss.
• Duty to verify signatures of authorized representatives — A bank cannot dispense with signature verification merely because the person presenting the check was a known authorized roving teller with prior transactions. The teller must at least glance at the person signing and compare the signature with the specimen signature. In this case, Iluminada’s failure to notice that Flores signed as “Rosauro C. Cayabyab” made Central Bank negligent.

• "The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family." — This passage states the high standard of diligence imposed on banks and is the core rule applied to hold Central Bank negligent for failing to verify Flores’ signature.
• "Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiff’s 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 courts shall mitigate the damages to be awarded." — This passage is the ratio decidendi for mitigating Central Bank’s liability and for modifying the equal allocation of loss.
• "In line with the ruling in Consolidated Bank, the Court deems it proper to allocate the loss between petitioner and Citytrust on a 60-40 ratio." — This passage states the dispositive modification of the Court of Appeals Decision and the specific allocation of loss.
• "Had she done that, she would have readily been put on notice that Flores was affixing, not his but a fictitious signature." — This passage explains why Central Bank’s teller was negligent and why the prior-transaction excuse did not justify dispensing with signature verification.

• Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003, 410 SCRA 562, 574-575 — Cited as the controlling precedent for the bank-depositor relationship, the fiduciary nature of banking, the high standards of diligence required of banks, and the 60-40 allocation of loss. The Court quoted it at length and expressly followed it in allocating the loss.

• Republic Act No. 625 (old Central Bank Law) — The statutory basis for Citytrust maintaining a demand deposit account with petitioner Central Bank. It establishes the relationship from which the dispute arose.
• Article 1980, Civil Code — Quoted in Consolidated Bank: savings and deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Applied to characterize the bank-depositor relationship as debtor-creditor.
• Section 2, Republic Act No. 8791 — Declares that the State recognizes the fiduciary nature of banking requiring high standards of integrity and performance. Applied as statutory affirmation of the high diligence standard imposed on banks; although it took effect on June 13, 2000, jurisprudence at the time of the transaction already imposed the same standard.
• Article 1172, Civil Code — Responsibility arising from negligence in the performance of every kind of obligation is demandable, but such liability may be regulated by the courts according to the circumstances. Applied to require the degree of diligence prescribed by law or contract; absent stipulation, the diligence of a good father of a family, with banks subject to higher statutory diligence.
• Article 2179, Civil Code — If the plaintiff’s 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 courts shall mitigate the damages to be awarded. Applied to mitigate Central Bank’s liability due to Citytrust’s contributory negligence and to allocate the loss on a 60-40 ratio.

Dante O. Tinga, Presbitero J. Velasco, Jr., Antonio Eduardo B. Nachura, and Arturo D. Brion.