View full case

EQUITABLE BANKING CORPORATION v. SPECIAL STEEL PRODUCTS

FACTS:

Respondent Special Steel Products, Inc. (SSPI) sold welding electrodes to its customer, International Copra Export Corporation (Interco), who issued three crossed checks payable to SSPI and drawn against petitioner Equitable Banking Corporation (Equitable). Jose Isidoro Uy, an employee of Interco, claimed to have good title to the checks and demanded that they be deposited in his personal accounts at Equitable. Equitable, relying on Uy's representations and his status as a valued client, accepted the checks for deposit in Uy's accounts. Subsequently, SSPI discovered that Uy received the proceeds of the checks instead of SSPI, and Interco eventually paid the value of the checks to SSPI. SSPI and its President, Augusto Pardo, filed a complaint against Uy and Equitable, alleging that the restrictive nature of the checks was ignored and the checks were deposited in Uy's account due to Uy's fraudulent representations and Equitable's gross negligence or connivance. They sought damages, including actual and unrealized interest income from the checks, moral damages, exemplary damages, and attorney's fees.

In a separate case, SSPI, through Pardo, entered into a loan agreement with Devcon Shipbuilders and Repair, Inc. (Devcon) and issued crossed checks in favor of Devcon. However, Devcon indorsed the checks to Pacific Mercantile Bank (PMB) without Pardo's knowledge. PMB credited the amount to the personal account of its employee Uy. Equitable allowed the deposit in Uy's account and transferred the funds to PMB without Pardo's consent. Pardo discovered the unauthorized deposit and demanded that Equitable rectify the mistake, but was unsuccessful. SSPI filed a case against Equitable, alleging that it was liable for quasi-delict and for wrongfully attaching Equitable's personal properties. The trial court ruled in favor of SSPI and awarded damages to SSPI.

Equitable appealed these rulings to the Court of Appeals (CA), but the CA affirmed the trial court's decision, finding Equitable liable for quasi-delict and upholding the damages awarded by the trial court.

ISSUES:

  1. Whether or not SSPI has a cause of action for quasi-delict against Equitable.

  2. Whether or not Equitable observed the required degree of diligence expected of a banking institution.

  3. Whether SSPI is entitled to claim interest payments as actual damages.

  4. Whether Equitable is liable for actual damages suffered by SSPI.

  5. Whether the award of moral damages to Pardo is excessive.

  6. Whether Equitable can recover amounts from Uy.

  7. Whether Equitable's counter-claim for wrongful preliminary attachment is valid.

  8. Whether or not the attachment of Equitable Banking Corporation's properties was wrongful.

  9. Whether or not Equitable Banking Corporation is entitled to damages.

  10. Whether Jolly Uy is liable to reimburse Equitable Banking Corporation.

  11. Whether Special Steel Products, Inc. is liable to pay damages to Equitable Banking Corporation.

RULING:

  1. SSPI has a cause of action for quasi-delict against Equitable. The cause of action is not based on the undelivered checks, but on the act of negligence committed by Equitable, which caused damage to SSPI.

  2. Equitable did not observe the required degree of diligence expected of a banking institution. The bank failed to exercise caution and diligence in verifying the authenticity of the indorsement and the authority of the person presenting the crossed checks for deposit.

  3. SSPI is not entitled to claim interest payments as actual damages since they did not recover interest payments at the stipulated rate from Interco. SSPI cannot lose something that it was not entitled to in the first place. SSPI's claim for interest income based on the stipulated interest rate in its contract with Interco is fallacious. Instead, SSPI is entitled to recover interest at the legal rate of 6% per annum as an award for damages based on quasi-delict and not for a loan or forbearance of money.

  4. Equitable is solidarily liable with Uy to compensate SSPI for the damages it suffered due to the conversion of the checks. Equitable's role in the conversion deprived SSPI of the use of the checks, making them liable for actual damages.

  5. The award of P3 million as moral damages to Pardo is excessive. Moral damages are given to the plaintiff to assuage their sufferings, not to punish the defendant. Considering the circumstances, an award of P50,000 as moral damages is reasonable.

  6. Equitable is allowed to recover amounts from Uy as it became an unwitting instrument in Uy's scheme. Equitable did not profit from Uy's scheme, and not allowing Equitable's cross-claim against Uy would unjustly enrich Uy at the expense of Equitable.

  7. The trial court erred in dismissing Equitable's counter-claim for wrongful preliminary attachment. There is no showing of fraud on Equitable's part in allowing Uy to deposit the checks, thus the issuance of the writ of preliminary attachment should not have been made in favor of SSPI. Equitable is entitled to damages for the wrongful attachment, including expenses for a counter-bond and damage to its goodwill and business credit.

  8. The attachment of Equitable Banking Corporation's properties was wrongful. The affidavit and allegations of the complaint failed to provide specific and definite allegations of fraud against Equitable, which would justify the attachment. The court found that there was no clear and concrete factual circumstances manifesting that Equitable had a preconceived plan or intention not to pay the creditor.

  9. Equitable Banking Corporation is entitled to recover actual damages. Equitable proved its claim for actual damages, as it was compelled to pay a counter-bond in order to lift the attachment. However, Equitable failed to prove that it sustained damages to its "goodwill and business credit" or that respondents' actions caused public embarrassment and a bank run.

  10. Jolly Uy is ordered to reimburse Equitable Banking Corporation the amounts that the latter will pay to respondents.

  11. The dismissal of Equitable Banking Corporation's counterclaim for damages against Special Steel Products, Inc. is reversed. Special Steel Products, Inc. is ordered to pay Equitable Banking Corporation actual damages in the total amount of P30,204.36 for the wrongful preliminary attachment of its properties.

PRINCIPLES:

  • A quasi-delict is an act or omission, there being fault or negligence, which causes damage to another. Quasi-delicts exist even without a contractual relation between the parties.

  • The nature of crossed checks should place a bank on notice that it should exercise more caution or expend more than a cursory inquiry to ascertain whether the payee on the check has authorized the holder to deposit the same in a different account.

  • Banks are expected to observe the highest degree of diligence and high standards of integrity and performance, especially since the banking business is impressed with public interest and the trust and confidence of the public in banks is of paramount importance.

  • Gross negligence is the absence of or failure to exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless disregard of consequences without exerting any effort to avoid them.

  • The banking system is placed in peril when bankers act out of blind faith and empty promises, without requiring proof of assertions and without making appropriate inquiries.

  • Crossed checks bear nothing on their face that supports the belief that the drawer made the checks payable to a person other than the named payee.

  • Actual damages encompass the value of the loss sustained by the plaintiff and the profits that the plaintiff failed to obtain.

  • Provisions of a contract generally take effect only among the parties, their assigns, and heirs.

  • Moral damages are recoverable when they are the proximate result of the defendant's wrongful act or omission.

  • Unjust enrichment occurs when a person is unjustly benefited at the expense of another.

  • Damages for wrongful preliminary attachment may be awarded if there is no showing of fraud or wrongdoing on the part of the defendant.

  • A writ of preliminary attachment should not be issued based on mere abstractions of fraud. There must be clear and concrete factual circumstances manifesting that the debtor practiced fraud upon the creditor.

  • The wrongfulness of a preliminary attachment does not automatically warrant the award of damages. The debtor has the burden of proving the nature and extent of the injury suffered as a result of the wrongful attachment.

  • Reimbursement of Amounts Paid - Pertains to the obligation of a party who was required to pay for what was due to another to be reimbursed by the party who was unable to fulfill their obligation.

  • Counterclaim for Damages - In certain cases, a defendant can file a counterclaim against the plaintiff, seeking damages for any harm caused by the plaintiff's actions or claims in the case.