Far East Bank and Trust Company vs. Pacilan, Jr.

A bank does not commit abuse of rights under Article 19 of the Civil Code when it closes a depositor's current account pursuant to its express rules and regulations, where the depositor has repeatedly and extensively overdrawn the account and issued checks with irregular signatures, and where no evidence shows the bank acted with malice, bad faith, or sole intent to prejudice the depositor. The resulting harm to the depositor is damnum absque injuria — damage without legal injury — for which the law affords no remedy.

Respondent Themistocles Pacilan, Jr. was a depositor maintaining a current account with petitioner Far East Bank and Trust Company (now Bank of the Philippine Islands) at its Bacolod Branch, having opened Current Account No. 53208 (0052-00407-4) on May 23, 1980. The respondent was a cashier at Prudential Bank and Trust Company, whose branch office was located across from petitioner bank, and was described as a prominent figure in civic and banking communities. The relationship between the parties was governed by petitioner bank's Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits, which the respondent agreed to upon opening his account. Those rules reserved to the bank the right to close an account if the depositor frequently drew checks against insufficient funds, and the right to return checks drawn against insufficient funds for any reason.

Respondent Themistocles Pacilan, Jr. opened Current Account No. 53208 (0052-00407-4) with petitioner Far East Bank and Trust Company's Bacolod Branch on May 23, 1980. Over the years, the respondent issued numerous postdated checks to various payees drawn against the account. Sometime in March 1988, the respondent issued Check No. 2434886 in the amount of ₱680.00, which was presented for payment to petitioner bank on April 4, 1988. Upon presentment, the check was dishonored. The following day, April 5, 1988, the respondent deposited ₱800.00 to his current account, which the bank accepted, increasing his balance to ₱1,051.43.

When the respondent inquired about the dishonor of his check, he discovered that his current account had been closed on the ground that it was "improperly handled." Bank records disclosed that between March 30, 1988 and April 5, 1988, the respondent had issued four checks — Check No. 2480416 for ₱6,000.00, Check No. 2480419 for ₱50.00, Check No. 2434880 for ₱680.00, and Check No. 2434886 for ₱680.00 — totaling ₱7,410.00. At the time, the respondent's account held only ₱6,981.43, resulting in an overdraft of ₱428.57. For this reason, petitioner bank, through its branch accountant Roger Villadelgado, closed the respondent's current account effective the evening of April 4, 1988, and Check No. 2434886 was dishonored.

The respondent wrote to petitioner bank on April 18, 1988, complaining that the closure was unjustified. He asserted that on the first banking hour of April 5, 1988, he had already deposited an amount sufficient to fund his checks, and that under normal banking procedure, the bank had until the last clearing hour of the following day to honor or return the check. The respondent, a cashier at Prudential Bank and Trust Company located across from petitioner bank, claimed that the indecent haste attending the closure was patently malicious and intended to embarrass him, exposing him to potential criminal prosecution under Batas Pambansa Blg. 22 and causing him social humiliation, wounded feelings, and sleepless nights.

Petitioner bank and Villadelgado countered that the respondent's account was subject to the bank's Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits, which reserved to the bank the right to close an account if the depositor frequently drew checks against insufficient funds. They presented evidence showing that the respondent's account had been overdrawn 156 times in 1986, 117 times in 1987, and 26 times in 1988, all due to issuance of checks against insufficient funds. There were also several instances where the respondent signed checks with a signature different from the specimen on file. The trial court found that the bank's own rules allowed a check returned for insufficiency of funds to be recleared for one more time, and that in previous instances the bank had notified the respondent of overdrafts and allowed him to make timely deposits. The Court of Appeals affirmed these factual findings, observing that the bank closed the account without notifying the respondent and still accepted his deposit on April 5, 1988, even after closure.

• Good Faith in Account Closure: Petitioner bank maintained that, in closing the respondent's account on the evening of April 4, 1988, it acted in good faith and in accordance with its Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits, which expressly reserve to the bank the right to close an account if the depositor frequently draws checks against insufficient funds and/or uncollected deposits, and the right to return checks drawn against insufficient funds for any reason.
• Pattern of Irregular Handling: Petitioner bank argued that the respondent had improperly and irregularly handled his current account, as evidenced by 156 overdrafts in 1986, 117 in 1987, and 26 in 1988, as well as several instances of deliberately signing checks with a signature different from the specimen on file, justifying the closure for "improper handling."
• No Legal Right to Cure: Petitioner bank posited that there is no law or rule giving the respondent a legal right to make good his check or deposit the corresponding amount within 24 hours after the same is dishonored or returned for having been drawn against insufficient funds.
• No Violation of Article 19: Petitioner bank vigorously denied violating Article 19 of the Civil Code, insisting that it acted in good faith and in accordance with pertinent banking rules and regulations.

• Unjustified Closure: Respondent alleged that the closure of his current account was unjustified because on the first banking hour of April 5, 1988, he already deposited an amount sufficient to fund his checks, and that under normal banking procedure, the bank had until the last clearing hour of the following day to honor or return the check.
• Malicious Conduct: Respondent claimed that the indecent haste attending the closure was patently malicious and intended to embarrass him, given his position as a cashier at Prudential Bank and Trust Company and his prominence in civic and banking communities.
• Entitlement to Damages: Respondent asserted that the bank's acts besmirched his reputation and caused him social humiliation, wounded feelings, insurmountable worries, and sleepless nights, entitling him to moral and exemplary damages.

• Abuse of Rights: Whether petitioner bank committed an abuse of rights under Article 19 of the Civil Code when it closed the respondent's current account on April 4, 1988, notwithstanding its reserved contractual right to do so.
• Bad Faith or Malice: Whether the respondent discharged his burden of proving that petitioner bank acted in bad faith or with malice in closing the account and dishonoring the check.
• Entitlement to Damages: Whether the respondent is entitled to an award of moral and exemplary damages for the closure of his current account.

• Abuse of Rights: No. The bank did not commit abuse of rights under Article 19 of the Civil Code, the second and third elements thereof — exercise in bad faith and for the sole intent of prejudicing another — not being attendant.
• Bad Faith or Malice: No. The respondent failed to prove bad faith or malice on the part of petitioner bank; the bank's closure of the account was justified by the respondent's extensive pattern of overdrafts and irregular check issuances, and the acceptance of the deposit the day after closure constituted at most simple negligence, not bad faith.
• Entitlement to Damages: No. The respondent's case is one of damnum absque injuria — damage without legal injury — because the bank's exercise of its contractual right was done in good faith and did not constitute a breach of any legal duty owed to the respondent.

• Abuse of Rights: Article 19 of the Civil Code requires three elements for abuse of rights: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. While petitioner bank undeniably possessed the right to close the respondent's account under its rules and regulations — which the respondent agreed to upon opening his account — the second and third elements were not established. The bank's rules expressly reserved the right to close an account if the depositor frequently drew checks against insufficient funds. On April 4, 1988, the respondent's account was already overdrawn by ₱428.57, as he had issued four checks totaling ₱7,410.00 against a balance of only ₱6,981.43. Moreover, the respondent's account had been overdrawn 156 times in 1986, 117 times in 1987, and 26 times in 1988, and he had signed checks with a signature different from the specimen on file. These circumstances, taken together, justified the bank's closure of the account for "improper handling." Nowhere under the bank's rules was it required to notify the depositor of the closure, and no malice could be imputed given the respondent's extensive history of improper account handling.

• Bad Faith or Malice: The law always presumes good faith, and the burden of proving bad faith rests on the party claiming damages. Good faith consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another. Bad faith does not simply connote bad judgment or simple negligence; it implies dishonest purpose, moral obliquity, or conscious doing of wrong. Malice connotes ill-will or spite and an intention to do ulterior and unjustifiable harm. The evidence presented by petitioner bank — the hundreds of overdrafts and the irregular signatures — negated the existence of bad faith or malice. The bank's acceptance of the respondent's deposit on April 5, 1988, after the account had already been closed, could be characterized as simple negligence by its personnel, but simple negligence by itself is not constitutive of bad faith. The respondent thus failed to discharge his burden of proving that the bank was motivated by ill-will or spite.

• Entitlement to Damages: There is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss or harm resulting from the injury; and damages are the recompense awarded for the damage suffered. There can be damage without injury — damnum absque injuria — where the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone. To maintain an action, the plaintiff must establish that his injuries resulted from a breach of duty owed to him by the defendant. Here, the respondent's repeated improper and irregular handling of his account constrained petitioner bank to close it in accordance with its rules and regulations. The bank did not breach any legal duty owed to the respondent. Whatever damages the respondent suffered — such as the dishonor of his other insufficiently funded checks — must be borne by him alone. The respondent's case is clearly one of damnum absque injuria.

• Abuse of Rights (Article 19, Civil Code) — The doctrine requires three elements: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of the provision. The law always presumes good faith, and the burden of proving bad faith or ill-motive rests on the party seeking damages. In this case, the bank possessed a contractual right to close the account, but the respondent failed to prove the bank exercised that right in bad faith or with sole intent to injure.

• Damnum Absque Injuria — Damage without injury; a situation where loss or harm was not the result of a violation of a legal duty. In such cases, the law affords no remedy and the consequences must be borne by the injured person alone. The Court applied this doctrine to hold that the respondent's damages from the closure of his account — including the dishonor of his other checks — resulted from his own repeated improper handling of the account, not from any breach of legal duty by the bank.

• Distinction Between Damages and Injury — Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm resulting from the injury; and damages are the recompense or compensation awarded for the damage suffered. There can be damage without injury. To maintain an action, the plaintiff must establish a concurrence of injury to the plaintiff and legal responsibility by the person causing it, with the breach of duty being the proximate cause of the injury.

• "The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of the said provision." — This passage states the canonical three-element test for abuse of rights under Article 19 of the Civil Code, which is the controlling framework for evaluating whether the exercise of a legal right gives rise to liability.

• "Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty." — This passage defines the distinction between injury, damage, and damages, and articulates the doctrine of damnum absque injuria, which the Court applied to deny the respondent's claim.

• "The respondent's case is clearly one of damnum absque injuria." — This is the Court's concluding characterization of the respondent's situation, encapsulating the ratio decidendi that no legal injury was committed by the bank and therefore no damages are recoverable.

• Development Bank of the Philippines vs. Court of Appeals, G.R. No. 137916, December 8, 2004, 445 SCRA 500 — Cited for the proposition that the elements of abuse of rights under Article 19 are: (a) existence of a legal right or duty; (b) exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Followed as controlling authority.

• ABS-CBN Broadcasting Corporation vs. Court of Appeals, G.R. No. 128690, January 21, 1999, 301 SCRA 572 — Cited for the principle that malice or bad faith is at the core of Article 19 of the Civil Code. Followed.

• Chua vs. Court of Appeals, G.R. No. 112660, March 14, 1995, 242 SCRA 341 — Cited for the rule that the law always presumes good faith and the burden of proving bad faith rests on the party claiming damages. Followed.

• Saber vs. Court of Appeals, G.R. No. 132981, August 31, 2004, 437 SCRA 259 — Cited for the definitions of good faith, bad faith, and malice. Good faith consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another; bad faith implies dishonest purpose or conscious doing of wrong; malice connotes ill-will or spite. Followed.

• BPI Express Card Corporation vs. Court of Appeals, G.R. No. 120639, September 25, 1998, 296 SCRA 260 — Cited for the distinction between damages and injury and the doctrine of damnum absque injuria. Followed as the basis for denying the respondent's claim.

• Article 19, Civil Code of the Philippines — Provides that "[e]very person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." The lower courts anchored their award of damages on this provision, but the Supreme Court held that the elements of abuse of rights — particularly bad faith and sole intent to prejudice — were not established.

• Article 20, Civil Code of the Philippines — Provides that "[e]very person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same." The trial court cited this provision, but the Supreme Court's analysis focused on Article 19 and the absence of a breach of legal duty.

• Rules and Regulations Governing the Establishment and Operation of Regular Demand Deposits (Petitioner Bank's Rules) — The bank's own rules, agreed to by the respondent upon opening his account, reserved the right to close an account if the depositor frequently draws checks against insufficient funds, and the right to return checks drawn against insufficient funds for any reason. The Court held that the bank validly exercised this contractual right in good faith.

Justice Reynato S. Puno (Chairman), Justice Ma. Alicia Austria-Martinez, Justice Dante O. Tinga, and Justice Minita V. Chico-Nazario concurred in the decision.