Equitable PCIBank vs. Spouses Lacson and Yuching

A drawee bank that dishonors checks drawn against insufficient funds or a closed account does not suffer actual or compensatory damages where no amount left its coffers through collection, withdrawal, or disbursement; actual damages must be proved by competent evidence of the fact and amount of loss. Consequently, exemplary damages and attorney's fees, which depend on a valid award of compensatory damages, cannot be granted.

Equitable PCIBank (EPCIB), now BDO Unibank, Inc., maintained the current accounts of Spouses Maximo and Soledad Lacson and their daughter Nonnita Lacson (Normita) at its C.M. Recto branch, where Marietta F. Yuching served as branch manager. The Lacsons used the accounts in their textile business. Check kiting, as described in the decision, is a procedure by which checks drawn on accounts in separate banks are used to generate short-term purchasing power through the bank's credit, often by depositing a check before collection and making it good before presentment.

Spouses Maximo and Soledad Lacson and their daughter Nonnita Lacson (Normita), collectively the Lacsons, maintained two current accounts with the C.M. Recto branch of Equitable PCIBank (EPCIB), now BDO Unibank, Inc. One was a joint account of the Spouses Lacson, while the other was the sole account of Normita. The Lacsons used both accounts to issue checks in the conduct of their textile business.

EPCIB alleged that sometime in 2002 the Lacsons experienced serious difficulties in their collections and engaged in the fraudulent and malicious practice of kiting, in connivance with Marietta F. Yuching, Branch Manager of EPCIB's C.M. Recto branch. According to EPCIB, Yuching acted beyond the authority given to her by the bank, to the latter's damage and prejudice. Based on EPCIB's investigation, from November 2002 to January 2003, the Lacsons deliberately built up their balance by continuously, repeatedly, and interchangeably drawing checks from one account and depositing the proceeds thereof to their other account, without sufficient funds. Since most of the checks were "on us" or "same branch" checks, the transfer of funds was easily facilitated despite no actual deposits in both accounts. During the subject period, the Lacsons issued and drew from their accounts 214 checks that proved to be Drawn Against Insufficient Funds (DAIF). The scheme allegedly ended when two of the Lacsons' checks, each with a face value of P10 Million, were dishonored for being drawn against a closed account.

On January 7, 2003, Yuching reported the supposed kiting to her superiors. On even date, the Bank's Senior Vice President, Annie H. Ngo, immediately stopped all activities involving the Lacsons' current accounts. Consequently, Yuching called EPCIB's Senior Vice President and Head of the Retail Banking Group, Dennis Velasquez, to inform him that the Lacsons promised to sign a real estate mortgage (REM) to settle their obligations with the bank. However, the Lacsons reneged on their promise and failed to execute the REM in favor of EPCIB.

In her Answer with Compulsory Counterclaim, Yuching denied conspiring with the Lacsons and stressed that she discovered their kiting scheme only in December 2002. She admitted calling SVP Velasquez, but only for the purpose of facilitating the ongoing negotiations for the settlement of the outstanding obligations of the Lacsons, and after SVP Ngo refused to talk to her. She further asserted that the Lacsons turned over eight Transfer Certificates of Title and endorsed several post-dated checks to EPCIB for the settlement of their obligations. On the other hand, the Lacsons denied ever using their current accounts with EPCIB for fraudulent and malicious practices. They lamented that contrary to normal banking policy, their accounts were subjected to several deductions which were not supported by debit memos, and the bank accepted checks for negotiation despite the variation between the spelled words and written figures therein. Finally, the Lacsons maintained that there was no actual withdrawal of P20 Million from either of their current accounts.

The dishonor of the checks was uncontroverted. EPCIB presented a flow chart and/or spreadsheet of the check-kiting activities in the Lacsons' accounts, which ostensibly showed how they intentionally and fraudulently built up their balances. EPCIB, however, failed to show, or even allege, that the subject P20 Million, or any other amount for that matter, left its coffers through collection, withdrawal, or any other form of disbursement on the subject checks. The petition also recognized that although the proceeds of the subject checks amounting to P20 Million were drawn from the Lacsons' account and subsequently credited to their other account before the checks were cleared, the same checks were eventually dishonored by EPCIB due to account closure.

• Preponderance of Evidence: EPCIB insisted that the court a quo committed serious and reversible error in reversing the findings of the RTC notwithstanding that EPCIB had proven its case by preponderance of evidence.
• Loss or Damage: EPCIB argued that the CA erred in ruling that EPCIB did not suffer loss or damage when it dishonored the checks issued by the Lacsons.
• Exemplary Damages and Attorney's Fees: EPCIB maintained that the CA erred in holding that EPCIB is not entitled to exemplary damages and attorney's fees.

• Procedural Defect: Spouses Lacson contended that EPCIB's petition is procedurally defective.
• Preponderance and Cause of Action: Spouses Lacson argued that EPCIB failed to prove its cause of action by preponderance of evidence.
• Actual Damages: Spouses Lacson maintained that EPCIB is not entitled to actual damages.
• Exemplary Damages, Attorney's Fees, and Costs: Spouses Lacson argued that EPCIB is not entitled to exemplary damages, attorney's fees, and costs of suit.
• Yuching's Non-Participation: Yuching re-pleaded that she did not participate, connive, or collude relative to any kiting activities committed by the Spouses Lacson.
• Damages: Yuching argued that EPCIB is not entitled to any of the damages being claimed.

• Preponderance of Evidence and Actual Damages: Whether the CA erred in reversing the RTC's findings and in ruling that EPCIB did not suffer loss or damage when it dishonored the checks issued by the Lacsons, thereby not entitling EPCIB to actual damages.
• Exemplary Damages: Whether EPCIB is entitled to exemplary damages.
• Attorney's Fees and Costs of Suit: Whether EPCIB is entitled to attorney's fees and costs of suit.

• Preponderance of Evidence and Actual Damages: No. The CA correctly reversed the RTC; actual damages cannot be presumed and must be proved by competent evidence, and the dishonored checks caused no actual loss because no money left EPCIB's coffers.
• Exemplary Damages: No. Exemplary damages require, among other requisites, entitlement to compensatory damages, which EPCIB failed to establish.
• Attorney's Fees and Costs of Suit: No. Attorney's fees may be awarded when exemplary damages are awarded, but since exemplary damages were properly deleted, attorney's fees must likewise be omitted; the CA's dismissal, affirmed, leaves no basis for the RTC's award of costs.

• Preponderance of Evidence and Actual Damages: Under Article 2199 of the Civil Code, actual or compensatory damages are awarded in satisfaction of, or in recompense for, loss or injury sustained; they are designed to repair the wrong done and compensate for the injury inflicted, not to impose a penalty. Yamauchi vs. Suñiga requires the injured party to prove two things: (1) the fact of the injury or loss and (2) the actual amount of loss with reasonable degree of certainty premised upon competent proof and on the best evidence available. Actual damages cannot be presumed and cannot be anchored on mere surmises, speculations, or conjectures; before they may be awarded, there must be competent proof of the actual amount of loss, and credence can be given only to claims duly supported by receipts. Here, the P20 Million awarded by the RTC represented the value of the checks the Lacsons issued but which were dishonored for being DAIF. The dishonor was uncontroverted, but the RTC awarded actual damages without distinctly stating the factual basis therefor. A check is dishonored by non-payment when it is duly presented for payment and payment is refused or cannot be obtained, or when presentment is excused and the instrument is overdue and unpaid; it is dishonored by non-acceptance when it is duly presented for acceptance and such acceptance is refused or cannot be obtained, or when presentment for acceptance is excused and the check is not accepted. In both instances, no actual collection is made on the check and no expense is charged against the bank. Thus, since the checks were dishonored, EPCIB did not suffer any damage or loss; by dishonoring the checks, EPCIB abated, thwarted, or forestalled any potential loss or damage it might have suffered had it not exercised extraordinary diligence. The money claimed as actual damages never left EPCIB's ledger and custody, and the Lacsons had no obligation to return the P20 Million which was never disbursed to them. EPCIB itself acknowledged that under normal checking transactions no harm is caused to a bank if checks are dishonored for being drawn against a closed account; while it argued that this was not a normal checking transaction and presented a flow chart and/or spreadsheet of the check-kiting activities, it failed to show or even allege that the P20 Million, or any other amount, left its coffers through collection, withdrawal, or any other form of disbursement. Even granting arguendo that the Lacsons committed check kiting, the Bank does not automatically become entitled to compensatory damages, as it is still charged with the burden to prove that it suffered injury as a result of the fraudulent scheme. The petition recognized that the proceeds of the subject checks amounting to P20 Million were drawn from the Lacsons' account and credited to their other account before the checks were cleared, but the same checks were eventually dishonored due to account closure, leaving the question of whether EPCIB suffered any injury considering that no cash was paid out by the bank nor received by the Lacsons by virtue of the dishonored checks. If any, the actual damages suffered by EPCIB could have been in the form of interest on the amounts reflected in the Lacsons' accounts, to the extent attributable to the check-kiting scheme, from the time such amounts were credited until their discovery and/or reversal by EPCIB; before the fraud was uncovered, the amounts were technically under the Lacsons' full control and custody, and the Lacsons derived benefits from the significant funding in such accounts in terms of business credit and loan integrity. The amount should be treated as having been borrowed by the Lacsons from EPCIB, given that they essentially used the latter's credit, making the Spouses Lacson answerable for the time value of the subject amounts. However, there was nothing in the petition regarding the interest on the subject amounts.
• Exemplary Damages: Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. The law allows exemplary damages in cases such as this to serve as a warning to the public and as a deterrent against repetition of deleterious actions. The requisites for an award of exemplary damages are: (1) they may be imposed by way of example or correction only in addition, among others, to compensatory damages, and cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant; (2) the claimant must first establish his or her right to moral, temperate, liquidated, or compensatory damages; and (3) the wrongful act must be accompanied by bad faith, and the award would be allowed only if the guilty party acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. In view of EPCIB's non-entitlement to actual or compensatory damages, the first and second requisites are unavailing, and the award of exemplary damages to EPCIB by the RTC becomes improper.
• Attorney's Fees and Costs of Suit: As regards attorney's fees and expenses of litigation, the general rule is that they may be recovered pursuant to a stipulation between the parties. In the absence thereof, they may only be recovered in particular situations, such as when exemplary damages are awarded. Inasmuch as the exemplary damages awarded to EPCIB have been deleted by the appellate court, the award of attorney's fees should likewise be omitted. The Court of Appeals' dismissal of the case, affirmed by the Supreme Court, set aside the RTC's judgment, including its award of costs of suit.

• Actual or Compensatory Damages Require Proof of Loss and Amount — Under Article 2199 of the Civil Code, actual or compensatory damages are awarded in satisfaction of, or in recompense for, loss or injury sustained. They are not presumed; the claimant must prove both the fact of the injury or loss and the actual amount of loss with reasonable degree of certainty based on competent proof and the best evidence available. In this case, EPCIB's P20 Million claim was denied because the dishonored checks did not result in any actual loss to the bank.
• Dishonor of a Check Does Not Automatically Cause Actual Damage to the Drawee Bank — A check is dishonored by non-payment or non-acceptance when payment or acceptance is refused or cannot be obtained, or when presentment is excused and the instrument is overdue and unpaid or not accepted. In both instances, no actual collection is made on the check and no expense is charged against the bank. Here, because EPCIB dishonored the checks, no money left its ledger or custody, and the bank suffered no actual damage.
• Check Kiting Does Not Automatically Entitle the Bank to Compensatory Damages — Even if a depositor engages in check kiting, the bank must still prove that it suffered injury as a result of the fraudulent scheme. Even assuming arguendo that the Lacsons committed check kiting, EPCIB failed to show that the P20 Million or any amount left its coffers through collection, withdrawal, or disbursement.
• Exemplary Damages Require Entitlement to Compensatory or Other Damages and Bad Faith — Exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. They cannot be recovered as a matter of right and require, among others, that the claimant first establish a right to moral, temperate, liquidated, or compensatory damages, and that the wrongful act be accompanied by bad faith. Because EPCIB was not entitled to actual or compensatory damages, exemplary damages were improper.
• Attorney's Fees Absent Stipulation Require a Legal Basis, Such as an Award of Exemplary Damages — Attorney's fees and expenses of litigation may be recovered pursuant to stipulation; absent stipulation, they may be recovered only in particular situations, such as when exemplary damages are awarded. Since the exemplary damages were deleted, the award of attorney's fees was also omitted.

• "Actual or compensatory damages are those damages which the injured party is entitled to recover for the wrong done and injuries received when none were intended. These are compensation for an injury and will supposedly put the injured party in the position in which [they were] before [they were] injured. Since actual damages are awarded to compensate for a pecuniary loss, the injured party is required to prove two things: (1) the fact of the injury or loss and (2) the actual amount of loss with reasonable degree of certainty premised upon competent proof and on the best evidence available." — This passage, quoting Yamauchi vs. Suñiga, states the controlling requisites for an award of actual or compensatory damages and anchors the denial of EPCIB's P20 Million claim.
• "We find merit in the CA's ruling that since the checks were dishonored, EPCIB did not suffer any damage or loss. It may be concluded that by dishonoring the checks, EPCIB was able to successfully abate, thwart, or forestall any potential loss or damage that it might have suffered had it not exercised extraordinary diligence. The money being claimed as actual damages never left EPCIB's ledger and custody. The Lacsons had no obligation to return the amount of P20 Million which, in the first place, was never disbursed to them by EPCIB." — This is the ratio decidendi on actual damages: the dishonor of the checks meant no actual disbursement or loss to the bank.
• "Even granting, arguendo, that the Lacsons indeed committed check kiting, the Bank does not automatically become entitled to the award of compensatory damages, as it is still charged with the burden to prove that it suffered injury as a result of the fraudulent scheme." — This passage establishes that check kiting, without proof of actual injury, does not justify compensatory damages.
• "In view of EPCIB's non-entitlement to the award of actual or compensatory damages, the first and second requisites are unavailing in this case and the award of exemplary damages to EPCIB by the RTC becomes improper." — This passage applies the requisites of exemplary damages and explains why the RTC's award could not stand once actual damages were disallowed.

• Yamauchi vs. Suñiga, 830 Phil. 122 (2018) — Cited for the requisites of actual damages: the fact of injury or loss and the actual amount of loss with reasonable degree of certainty based on competent proof and the best evidence available. The Court applied this standard to deny EPCIB's claim.
• Premiere Development Bank vs. Court of Appeals, 471 Phil. 704 (2004) — Cited for the definition of actual or compensatory damages under Article 2199 as compensation for injury sustained, not a penalty.
• Republic vs. Looyuko, 788 Phil. 1 (2016) — Cited for the rule that actual damages cannot be presumed and cannot rest on surmises, speculations, or conjectures.
• Dueñas vs. Guce-Africa, 618 Phil. 10 (2009) — Cited for the requirement that before actual damages may be awarded, there must be competent proof of the actual amount of loss, with credence given only to claims duly supported by receipts.
• Tan vs. OMC Carriers, Inc., 654 Phil. 443 (2011) — Cited for the rule that exemplary damages may be granted as a warning to the public and as a deterrent against repetition of deleterious actions.
• Spouses Timado vs. Rural Bank of San Jose, Inc., 789 Phil. 453 (2016) — Cited for the requisites of exemplary damages, including the claimant's prior entitlement to moral, temperate, liquidated, or compensatory damages.
• Perez vs. People, 192 Phil. 463 (1981) (Concurring Opinion of J. Aquino) — Cited for the definition of check kiting as securing temporary use of money through worthless paper and using bank credit.

• Article 2199, Civil Code — Actual or compensatory damages are those awarded in satisfaction of, or in recompense for, loss or injury sustained; they proceed from natural justice and are designed to repair the wrong done, not to impose a penalty. The Court applied this provision to require proof of actual loss.
• Article 2229, Civil Code — Exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. The Court applied this provision to deny exemplary damages because EPCIB had no actual or compensatory damages.
• Article 2208, Civil Code — Attorney's fees and expenses of litigation may be recovered pursuant to stipulation or, absent stipulation, in particular situations such as when exemplary damages are awarded. The Court applied this provision to omit attorney's fees after exemplary damages were deleted.
• Sections 83 and 149, Negotiable Instruments Law — Section 83 defines dishonor by non-payment; Section 149 defines dishonor by non-acceptance. The Court applied these provisions to explain that in both instances no actual collection is made on the check and no expense is charged against the bank.
• Rule 45, Rules of Court — Governs petitions for review on certiorari; EPCIB invoked this rule in filing its petition before the Supreme Court.

Gesmundo, C.J. (Chairperson), Hernando, Zalameda, and Marquez, JJ., concur.