Title
Philippine Savings Bank vs. Chowking Food Corp.
Case
G.R. No. 177526
Decision Date
Jul 4, 2008
Chowking sued PSBank after its employee encashed checks without proper endorsements; SC ruled PSBank negligent, holding it solidarily liable for the loss.
reimbursement
illegally encashed checks
branch head

Case Summary (G.R. No. 177526)

Factual Background

Between March 15, 1989 and August 10, 1989, Joe Kuan Food Corporation issued in favor of Chowking five PSBank checks. The checks carried the following numbers, dates, and denominations: Check No. 017069 for P44,120.00 dated 15 March 1989; Check No. 053528 for P135,052.87 dated 09 May 1989; Check No. 074602 for P160,138.12 dated 08 August 1989; Check No. 074631 for P159,634.13 dated 08 August 1989; and Check No. 017096 for P60,036.74 dated 10 August 1989. The total amount of the checks reached P556,981.86.

On the due dates, Chowking’s acting accounting manager Manzano endorsed and encashed the checks with PSBank’s Bustos branch, and all were honored by Santos. However, the signatures of the other authorized signatories of Chowking were absent from the checks, contrary to usual banking practice. After the encashment, Manzano unexpectedly absconded and misappropriated the check proceeds.

Demand and Filing of the Civil Case

After Chowking discovered Manzano’s scheme, it demanded reimbursement from PSBank. When PSBank refused to pay, Chowking filed a complaint for a sum of money with damages before the RTC. Aside from PSBank and Santos, Chowking also impleaded PSBank’s president, Antonio S. Abacan, alleging liabilities arising from the bank’s responsibilities under the circumstances.

The RTC case also involved cross-claims and third-party complaints. PSBank and Santos filed cross-claims and third-party complaints against Manzano. Despite efforts to serve summons, summonses were not served on Manzano. Santos did not take further action, and her third-party complaint was archived. The bank caused service of summons through publication on its cross-claims and third-party complaints. Manzano was later declared in default for failure to file a responsive pleading.

RTC Proceedings and Initial Decision

Chowking sought summary judgment, and PSBank opposed it. On February 1, 1995, the RTC denied the motion. In its Answer, PSBank did not controvert the foregoing key facts but denied liability to Chowking for the encashed checks. PSBank asserted that it had exercised due diligence in supervising its employees and even dismissed Santos after Santos was found guilty of negligence in the performance of her duties. Santos, for her part, denied negligence and claimed she merely followed the bank’s practice of honoring Chowking’s checks even when accompanied only by Manzano’s endorsement. Abacan also denied any liability, asserting he had no role in the transactions and that no cause of action existed against him.

The defenses of PSBank, Santos, and Abacan converged on the theory that Chowking was estopped from seeking reimbursement and damages because Chowking was negligent in allowing Manzano to take hold, endorse, and encash the checks. They argued that Chowking’s own negligence was the proximate cause of the loss.

On August 24, 1998, the RTC rendered judgment in favor of Chowking. It ordered PSBank and Santos, jointly and severally, to pay Chowking P556,981.86 plus 12% per annum interest from August 15, 1989; 20% of the total amount due as attorney’s fees; P100,000.00 as exemplary damages; and P1,000,000.00 for unrealized profits. The RTC dismissed the complaint as to Abacan and dismissed his counterclaim and cross-claim. It also ordered Santos and Manzano, in the cross-claim context, to reimburse PSBank whatever amount PSBank might be constrained to pay Chowking.

RTC Modification on Motion for Reconsideration

PSBank moved for reconsideration. On January 11, 1999, the RTC reversed its earlier ruling and held that Chowking’s own negligence was the proximate cause of the loss. In the modified decision, the RTC dismissed the complaint against PSBank and Santos for lack of basis in fact and law and shifted the monetary obligation to the third-party defendant, Manzano. It directed Manzano to reimburse Chowking P556,981.86 with 12% per annum interest from August 15, 1989, plus attorney’s fees equivalent to 20%, compensatory and actual damages of P100,000.00, and costs.

Appellate Review and the CA Ruling

Chowking appealed to the CA, arguing among others that the RTC erred in ruling that Chowking’s negligence was the proximate cause of its loss and in treating its claim as barred by estoppel.

On January 31, 2007, the CA granted the appeal. It set aside the RTC modified order and reinstated the original August 24, 1998 RTC decision, but deleted attorney’s fees, exemplary damages, and the award of P1,000,000.00 for unrealized profits.

The CA held that both PSBank and Santos should bear the loss. It treated the RTC’s earlier factual finding of Santos’s negligence as established, because Santos’s negligence in honoring Chowking’s checks over the counter despite missing the proper endorsements was regarded as uncontroverted. Accordingly, the CA concluded that Santos was liable for damages to Chowking, and the lower court erred when it dismissed the complaint against her.

The CA also rejected PSBank’s attempt to avoid liability on the ground that it neither consented to nor knew of Santos’s violations. It relied on Article 2176 in relation to Article 2180 of the Civil Code, reasoning that employer liability attaches for the damage caused by employees acting within the scope of assigned tasks, unless the employer proves that it observed the diligence of a good father of a family to prevent the damage. The CA emphasized that banking, imbued with public interest, demands a degree of diligence higher than that of a good father of a family. It found that PSBank failed to observe that highest degree of diligence because Chowking presented no evidence that PSBank formulated proper standard operating procedures, monitored their implementation, and imposed disciplinary measures for breaches.

Lastly, the CA disagreed with PSBank’s argument that Chowking’s negligence was the proximate cause. It reasoned that even assuming Chowking was negligent in allowing Manzano to encash the checks, PSBank had the “last clear chance” to avert injury and loss by ensuring Santos faithfully and carefully observed encashment rules and procedures. The CA noted that Santos cashed checks endorsed only by Manzano in circumstances where Manzano’s signature was apparently not an authorized signatory of Chowking. It considered it clear that Santos let the opportunity slip when ordinary prudence in checking endorsements could have prevented the loss.

Issues Raised Before the Supreme Court

PSBank sought review and assigned errors: first, that the CA erred in not ruling that Chowking was estopped from asserting its claim; and second, that the CA erred in not ruling that Chowking’s negligence was the proximate cause of its own loss.

The Supreme Court’s Treatment of Equitable Estoppel

The Supreme Court held that the doctrine of equitable estoppel or estoppel in pais did not apply. The Court invoked the principles that an admission or representation becomes conclusive upon the person making it and cannot be denied against the party who relied upon it to its prejudice. It further reiterated that the requisites of estoppel by pais include: (a) conduct amounting to false representation or concealment of material facts, or at least calculated to convey an impression inconsistent with the facts later asserted; (b) intent or expectation that such conduct would be acted upon or influenced by the other party; and (c) knowledge, actual or constructive, of the actual facts. The Court stressed that the most important element is that the party invoking estoppel must show it was misled to its prejudice.

Applying these standards, the Court found the element of misleading prejudice lacking. It agreed with the CA that Chowking did not make any false representation or concealment of material facts related to the encashment of the previous checks. The checks had been encashed in the past with the endorsements of other authorized signatories, not solely those of Manzano. Thus, Chowking had not allowed PSBank to encash its checks without the signature of all authorized signatories. The Court also adopted the CA’s assessment that, even if Chowking had impliedly tolerated Manzano in endorsing checks before, the previous endorsements were coupled with other signatories, meaning PSBank’s estoppel theory failed on the evidentiary premise that Manzano had endorsed alone in the prior course of dealing.

The Supreme Court further held that estoppel could not be appreciated against PSBank itself because PSBank failed to satisfy the essential elements of estoppel. It reasoned that PSBank had knowledge and the means to know the proper endorsements necessary for encashment. It was also concluded that PSBank could not claim good faith. The Court added that estoppel cannot be sustained in doubtful inference, and that misapplication of estoppel would turn the doctrine into an instrument to prevent a party from speaking the truth without conclusive proof of its requisites.

Due Diligence and Proximate Cause

Having rejected estoppel, the Supreme Court turned to the question of due diligence and proximate cause. The Court ruled that PSBank failed to prove that it observed the due diligence required of banks. It reiterated that banking business is impressed with public interest and that the diligence required is more than that of a Roman pater familias or a good father of a family. It cited the policy embodied in the General Banking Law of 2000 requiring banks to observe the highest standards of integrity and performance and the fiduciary nature of the relationship between

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