Bank of the Philippine Islands vs. Fernandez

A bank may not validly terminate a certificate of deposit without demanding and obtaining its endorsement and surrender; when a bank releases the proceeds in reliance on a false affidavit of loss, knowing that the certificate is actually in the possession of a co-depositor who had earlier presented it and demanded payment, the bank commits a breach of contract and acts in bad faith, precluding it from seeking indemnity from a third party who participated in the irregular transaction under the principle of in pari delicto.

In 1991, spouses Manuel and Tarcila Fernandez, together with their children Monique and Marco, opened four joint AND/OR interest-bearing deposit accounts with BPI’s Shaw Boulevard branch. The certificates of deposit expressly provided that endorsement and presentation of the certificate were necessary for renewal or termination. On September 24, 1991, Tarcila went to the branch and presented the certificates and passbook to pre-terminate the accounts. The branch manager, Elma Capistrano, refused and instead insisted on contacting Manuel, whom she regarded as the “primary depositor.” Minutes after Tarcila left, Manuel arrived, claimed the certificates were lost, and — with BPI’s active assistance — executed a pro-forma affidavit of loss, executed an indemnity agreement with his son-in-law Dalmiro Sian, and had the entire proceeds transferred to Sian’s newly opened account and immediately withdrawn. Tarcila never received her proportionate share. She filed a case for nullity of marriage and later a complaint for damages against BPI.

• Nature of the Accounts: In 1991, spouses Manuel and Tarcila Fernandez and their children Monique and Marco opened four joint AND/OR deposit accounts with BPI, evidenced by peso and FCDU time certificates of deposit and a savings passbook. The certificates uniformly stated: “Endorsement and presentation of the Certificate of Deposit is necessary for the renewal or termination of the deposit.” Pre-termination before maturity was subject to BPI’s discretion and an interest penalty.
• Tarcila’s Pre-termination Attempt: On September 24, 1991, Tarcila went to BPI Shaw Boulevard to pre-terminate the accounts. She brought and presented the certificates of deposit and the passbook. Branch manager Elma Capistrano refused to accommodate the request, insisting that Manuel must first be contacted as part of the bank’s “standard operating procedure.” Tarcila left the branch without completing the transaction.
• Manuel’s Request and the False Affidavit of Loss: Shortly after Tarcila left, Manuel arrived and likewise requested pre-termination. He claimed the same certificates of deposit were lost. Despite having seen the certificates in Tarcila’s possession only minutes earlier, Capistrano accepted Manuel’s representation, supplied BPI’s pro-forma affidavit of loss, and allowed him to execute it. BPI treated Manuel as the “primary depositor,” whom Capistrano considered the source and controller of the funds.
• Funneling of Proceeds: Two days later, Manuel returned with his lawyer, Atty. Hector Rodriguez, his son-in-law Dalmiro Sian, and two alleged NBI agents. Without presenting the certificates, Manuel submitted the affidavit of loss and executed an Indemnity Agreement with Sian discharging BPI from liability. BPI then pre-terminated the accounts, transferred the entire proceeds to a new account opened that day in Sian’s name, and had Sian sign blank withdrawal slips. Using those slips, Manuel immediately withdrew all the funds. Sian’s account was closed the same day. None of the other co-depositors were contacted.
• Demand and Litigation: Tarcila never received any share. She demanded payment from BPI, and upon refusal, filed a complaint for damages in the RTC of Makati. During pre-trial, the parties admitted the conjugal nature of the deposited funds.

• Conjugal Character of Funds: BPI insisted that the proceeds formed part of the conjugal partnership of gains, and therefore Tarcila’s share was merely inchoate. No damage could have resulted from payment to Manuel because Tarcila’s interest would be settled upon liquidation of the conjugal partnership.
• No Breach of Obligation: BPI claimed it processed Tarcila’s request but she left before completion. Even assuming it refused, the bank maintained it had the contractual discretion to deny pre-termination before maturity. Hence, no breach occurred.
• Absence of Bad Faith: BPI argued that its actions were mere precautionary measures, not wanton, fraudulent, or malevolent conduct. The bank invoked its standard operating procedure of verifying with the “primary depositor.”
• Validity of Indemnity Agreement: BPI contended that Dalmiro Sian’s consent was not vitiated when he signed the Indemnity Agreement; the records contained no proof of actual threat or intimidation. Thus, the Indemnity Agreement should discharge BPI from liability.

• Procedural Bar: Tarcila argued that the petition raised questions of fact which are not reviewable in a petition for review on certiorari under Rule 45.
• Bias and Bad Faith: Tarcila maintained that BPI’s acts were not mere precaution but clear indicia of bias, partiality, and bad faith, as shown by its differential treatment of her and Manuel.
• Irrelevance of Conjugal Property Rules: Tarcila countered that the internal rules on management of conjugal property could not justify BPI’s patently bad-faith conduct toward a co-depositor.

• Breach of Contract: Whether BPI breached its contractual obligations under the certificates of deposit by releasing the proceeds without requiring the surrender of the certificates.
• Bad Faith: Whether BPI’s actions constituted bad faith, warranting an award of exemplary damages.
• Indemnity Agreement: Whether BPI could validly invoke the Indemnity Agreement against third-party respondent Dalmiro Sian.
• Damages: Whether the awards of exemplary damages and attorney’s fees were proper.

• Breach of Contract: BPI substantially breached its obligations under the certificates of deposit. The express terms made endorsement and surrender of the certificates indispensable to termination. The bank had a duty to ensure the account holder’s identity and to demand the certificates before releasing the funds. BPI allowed termination without the certificates, and worse, did so with actual knowledge that the certificates were in Tarcila’s possession and not lost. The conjugal character of the funds was a misleading issue; the principal question was the bank’s violation of its contractual undertaking. As held in FEBTC v. Querimit, a bank acts at its peril when it pays deposits evidenced by a certificate of deposit without its production and surrender after proper indorsement.
• Bad Faith: The bank’s conduct constituted bad faith. Bad faith imports a dishonest purpose and conscious wrongdoing, or a breach of a known duty through motive, interest, or ill will. The branch manager’s own testimony revealed that she regarded Manuel as the “primary depositor” and the source of the funds, openly displayed bias against Tarcila, and knowingly accepted a false affidavit of loss. BPI did not merely fail to exercise the required degree of diligence; it actively facilitated Manuel’s scheme to divest his co-depositors of their shares and then attempted to conceal the irregularity by funneling the funds through Sian’s account.
• Indemnity Agreement: Although the evidence did not support a finding of vitiated consent by intimidation — because no act or threatened injury was shown — BPI could not enforce the Indemnity Agreement against Sian on the ground of in pari delicto. Both BPI and Sian participated in the deceptive scheme to allow Manuel to withdraw the funds despite knowing the certificates were not lost. BPI required the Indemnity Agreement precisely because it anticipated liability. Having come to court with unclean hands, BPI could not obtain affirmative relief against its co-participant.
• Damages: The award of exemplary damages (₱50,000.00) was proper because BPI’s gross negligence and bad faith caused prejudice to Tarcila; exemplary damages serve as a deterrent for the public good. The award of attorney’s fees (₱500,000.00) was likewise justified under Article 2208(1) of the Civil Code in view of the exemplary damages, and the amount was reasonable.

• Strict Compliance with Certificate of Deposit Terms — A certificate of deposit creates a contractual relationship between the bank and the depositor. Termination of the deposit requires strict compliance with its express conditions, chiefly the endorsement and surrender of the certificate. A bank that pays the deposit without demanding the certificate does so at its peril, and bears the burden of proving that the obligation has been validly discharged.
• Bank’s Fiduciary Duty — The business of banking is impressed with public interest, and the fiduciary nature of the bank-depositor relationship demands the highest degree of integrity, care, and respect in the treatment of accounts. The bank must treat all co-depositors equally and may not unilaterally prefer one over another, particularly when the account terms make the certificate’s surrender a precondition to withdrawal.
• Bad Faith Defined — Bad faith means a dishonest purpose and conscious wrongdoing; it is a breach of a known duty through some motive, interest, or ill will. When a bank knowingly accepts a false affidavit of loss to favor one co-depositor over another who holds the certificates, it acts in bad faith.
• In Pari Delicto — Under the doctrine of in pari delicto, courts will not grant relief to a party who bases a cause of action on its own illegal or wrongful act. When two parties jointly participate in an irregular transaction and the damage results from their joint offense, one cannot recover from the other. One seeking equity must come with clean hands.
• Exemplary Damages in Quasi-Delicts — Under Article 2231 of the Civil Code, exemplary damages may be granted if the defendant acted with gross negligence. Such damages are corrective and serve as a warning to the public against the repetition of deleterious actions.

• “Endorsement and presentation of the Certificate of Deposit is necessary for the renewal or termination of the deposit. … Without the presentation of the certificates of deposit, BPI may not validly terminate the certificates of deposit.” — The Court’s articulation of the overriding contractual obligation that governed the transaction.
• “A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without its production and surrender after proper indorsement.” — Quoting FEBTC v. Querimit, this passage encapsulates the strict-liability principle applicable to banks.
• “Bad faith imports a dishonest purpose and conscious wrongdoing. It means a breach of a known duty through some motive or interest or ill will.” — The definition of bad faith that the Court applied to BPI’s conduct.
• “The bias and bad faith on the part of [BPI]’s officers become readily apparent in the face of the fact that [BPI]’s officers did not require the presentation of the certificates of deposit from [Manuel] but even assisted and facilitated the pre-termination transaction … despite the fact that [BPI]’s officers were fully aware that the certificates were not lost but in the possession of [Tarcila].” — The CA’s finding, adopted by the Supreme Court, detailing BPI’s knowing participation.
• “When two parties, acting together, commit an illegal or wrongful act, the party held responsible for the act cannot recover from the other, because both have been equally culpable and the damage resulted from their joint offense.” — The ratio for applying in pari delicto to bar BPI’s claim on the Indemnity Agreement.

• FEBTC v. Querimit, 424 Phil. 721 (2002) — Followed as controlling authority for the rule that a bank must demand the surrender of the certificate of deposit before paying the proceeds; payment without such surrender is done at the bank’s peril.
• Vales v. Villa, 35 Phil. 769 (1916) — Distinguished. The Court applied its definition of vitiated consent by intimidation to find that Sian’s consent was not legally vitiated, but ultimately rendered the issue inconsequential due to in pari delicto.
• Cebu Country Club, Inc. v. Elizagaque, G.R. No. 160273, January 18, 2008 — Cited to support the public-policy rationale for exemplary damages as a deterrent.

• Article 1214, Civil Code — Applied by the trial court but not central to the Supreme Court’s ratio. The provision states that a debtor may pay any solidary creditor, but if a demand has been made by one, payment should be made to that creditor. The Supreme Court resolved the case on the basis of the deposit contract’s express terms rather than on solidary creditor rules.
• Article 19, Civil Code — The principle that every person must act with justice, give everyone his due, and observe honesty and good faith; invoked as a standard that BPI transgressed.
• Articles 2229 and 2231, Civil Code — Articles 2229 (exemplary damages imposed by way of example or correction for the public good) and 2231 (exemplary damages may be granted in quasi-delicts if the defendant acted with gross negligence) provided the statutory basis for affirming the exemplary damages award.
• Article 2208(1), Civil Code — Attorney’s fees may be recovered when exemplary damages are awarded; justified the ₱500,000.00 award.
• Section 2, Republic Act No. 8791 (General Banking Law of 2000) — Recognizes the fiduciary nature of banking that requires high standards of integrity and performance; cited to reinforce the bank’s heightened duty.

Associate Justices Lucas P. Bersamin, Mariano C. Del Castillo, Jose Catral Mendoza, and Marvic M.V.F. Leonen concurred.