PART III: Usury Law G.R. No.

171925 July 23, 2010

notice sent to us by the bank, or if no date is indicated, from the time the notice was sent. 6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment." Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the parties. For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the initial interest rate of 14.25% per annum (p.a.), the same was increased 15% p.a. effective May 19, 1997; it was again increased to 26% p.a. effective July 18, 1997. It was thereafter reduced to 20% p.a. effective August 18, 1997, and then increased to 24% p.a. effective September 17, 1997. The rate was increased further to 30% p.a.effective October 17, 1997, then decreased to 27% p.a. on November 17, 1997, and again increased to 34% p.a.effective December 17, 1997. The rate then decreased to 30% p.a. on January 16, 1998. For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24, 1997. A month later, the rate increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective August 24, 1997, but again increased to 22.5% p.a. effective September 24, 1997. For the next month, the rate surged to 30% p.a., and decreased to 27% p.a. for the month of November. The rate again surged to 34% p.a. for the month of December, and was decreased to 30% p.a. from January 22, 1998 to February 20, 1998. For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged at35% p.a., but this was decreased to 21% p.a. from August 14 until September 11, 1997. The rate increased slightly to 23% p.a. on September 12, 1997, and surged to 27% p.a. on October 13, 1997. The rate went down slightly to 27% p.a. for the month of November, and to 26% p.a. for the month of December. The rate, however, again surged to 30% p.a. on January 12, 1998 before settling at 29% p.a. for the month of February. It is [Permanents] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of. This is contrary to their earlier agreement that any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES. Permanent was then in the midst of the construction of its project in Merville, Paraaque City, and SOLIDBANK knew that it was relying substantially on the credit facility the latter extended to it. [Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of mutuality of agreement of the parties,

SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust Company), Petitioner, vs. ERMANENT HOMES, INCORPORATED, Respondent. DECISION CARPIO, J.: G.R. No. 171925 is a petition for review1 assailing the Decision2 promulgated on 29 June 2005 by the Court of Appeals (appellate court) as well as the Resolution3 promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The appellate court granted the petition filed by Permanent Homes, Incorporated (Permanent) and reversed the decision of the Regional Trial Court of Makati City, Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court ordered Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement about the applicable interest rates on Permanents loan. Solidbank was also ordered to render an accounting of Permanents payments, not to impose interest on interest upon Permanents loans, and to release the remaining amount available under Permanents omnibus credit line. The Facts The appellate court narrated the facts as follows: The records disclose that PERMANENT HOMES is a real estate development company, and to finance its housing project known as the "Buena Vida Townhomes" located within Merville Subdivision, Paraaque City, it applied and was subsequently granted by SOLIDBANK with an "Omnibus Line" credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly repricing. The remaining ONE MILLION was available for domestic bills purchase. To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena Vida project in Paraaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by three (3) promissory notes, which contain the following provisions, thus: "xxx 5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written

as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In addition, [Permanent] prays for the payment of compensatory, moral and exemplary damages. SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES loan availments during the monthly interest repricing dates, depending on the changes in prevailing interest rates in the local and international capital markets. In fact, SOLIDBANK avers that four (4) days before July 15, 1997, the Bangko Sentral ng Pilipinas (BSP) declared that it could no longer support the Philippine currency from external speculative forces, hence, the local currency was allowed to seek its own exchange rate level. As a result of the volatile exchange rate ratio, banks were then hesitant to extend loans, and in some instances that it granted loans, they had to ensure that they will not be at the losing end of the deal, so to speak, by the repricing of the interest rates every month. SOLIDBANK insists that PERMANENT HOMES should not be allowed to renege on its contractual obligations, as it freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and the promissory notes. PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha Julia Flores, its Treasury Officer. On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing, which enjoined SOLIDBANK from implementing and collecting the increases in interest rates and from initiating any action, including the foreclosure of the mortgaged properties. Ms. Lims testimony centered on PERMANENT HOMES allegations that the repricing of the interest rates was done by SOLIDBANK without any written agreement entered into between the parties. In fact, Ms. Lim accounted that SOLIDBANK will merely advise them of the interest rate for the period, after said period had already commenced, and at times very late in the period, by fax messages. When PERMANENT HOMES called SOLIDBANKs attention to the seemingly surging rates it imposed on its loan, SOLIDBANK will merely answer that it was the banks policy, without offering any basis for such increase. Furthermore, Ms. Lim also mentioned SOLIDBANKs alleged practice of imposing interest on unpaid interest, at the highest rate of 30% p.a.. Ms. Lim also presented a tabulation, which presents the number of days their billing statements were sent late, from the time the interest period started. It is PERMANENT HOMES stand that since the purpose of the billing statements was to inform them beforehand of the applicable interest rate for the period, the late billings will clearly show SOLIDBANKs arbitrary imposition of the repriced interest rates, as well as its indifference to PERMANENT HOMES plight. To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which should have notified PERMANENT HOMES of the repriced interest rates were faxed to

PERMANENT HOMES between eighteen (18) to thirty-three (33) days late. For the second loan availment in the amount of P18 million, the faxed billings were late between six (6) to twenty-one (21) days, and one instance where PERMANENT HOMES received no billing at all. For the third loan availment in the amount of P3.9 million, the faxed billings were late between seven (7) to twenty-nine (29) days, and also an instance where PERMANENT HOMES received no billing at all. This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction project was unnecessarily delayed, to its prejudice and its buyers. This was the import of the testimony of PERMANENT HOMES second witness, Engr. Rey A. Romasanta. According to Engr. Rey, the target date of completion was August 1997, but in view of the shortage of funds by reason of SOLIDBANKs refusal for PERMANENT HOMES to make further availments on its omnibus credit line, the project was completed only on February 1998. PERMANENT HOMES third and final witness was Martha Julia Flores, its Treasury Officer, who explained that as such, it was her who received the late billings from SOLIDBANK. She would also call up SOLIDBANK to ask what the repriced interest rate for the coming interest period, to no avail, as SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the period. Ms. Flores admitted that she prepared the tabulation presented before the court, which showed how late SOLIDBANKs billings were sent to PERMANENT HOMES, as well as the computation of interest rates that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the high and the low published lending rates of SOLIDBANK. SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that, contrary to PERMANENT HOMES assertions that it was not promptly informed of the repriced interest rates, SOLIDBANKs officers verbally advised PERMANENT HOMES of the repriced rates at the start of the period, and even added that their transaction[s] were based on trust. Aside from these allegations, however, no written memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT HOMES was timely advised of the repriced interests.4 The Trial Courts Ruling On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court ratiocinated and ruled thus: It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by [Permanent] as an afterthought and as an obvious subterfuge intended to completely lay on the defendant the blame for the debacle of its Buena Vida project. An afterthought because the records of the case show that the complaint was filed in March 16, 1998, already after it was having difficulty making the amortization payments, the last of which being in February 1998. A subterfuge because plaintiff, instead of blaming itself and its own business judgment that went sour, would rather put the blame on [Solidbank], taking advantage of every conceivable gray area of its contract with [Solidbank] to avoid its own liabilities. In fact, this complaint was made the very basis for [Permanent] to altogether stop the payment of its loan from [Solidbank] including the interest payment (TSN, May 07, 1998, p. 60). xxxx

WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing the said complaint. The Counterclaim is likewise dismissed for lack of evidence to support the same. SO ORDERED.5 Permanent filed an appeal before the appellate court. The Appellate Courts Ruling The appellate court granted Permanents appeal, and set aside the trial courts ruling. The appellate court not only recognized the validity of escalation clauses, but also underscored the necessity of a basis for the increase in interest rates and of the principle of mutuality of contracts. The dispositive portion of the appellate courts decision reads, thus: THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated July 5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1) Unless the parties herein subsequently enter into an express agreement regarding the applicable interest rates on PERMANENT HOMES loan availments subsequent to the initial thirty-day (30) period, the legal rate of twelve percent (12%) per annum is hereby FIXED, to be applied on the outstanding balance of the loan; (2) SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES, and in case there is excess payment by reason of the wrongful imposition of the repriced interest rates, to apply such amount to the interest payment at the legal rate, and thereafter to the outstanding principal amount; (3) SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT HOMES loan, there being no evidence that the latter was in default on its payments; (4) SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit line, subject, however, to availability of funds on the part of SOLIDBANK. No pronouncement as to costs. SO ORDERED.6 The appellate court resolved to deny Solidbanks Motion for Reconsideration for lack of merit.7 The Issues Solidbank raised the following issues in their petition: (A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates

on [Permanents] loans are void for having been unilaterally imposed without basis. (B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express agreement regarding the applicable interest rates on Permanents loan availments subsequent to the initial thirty-day (30) period. (C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to attorneys fees notwithstanding the absence of bad faith or malice on the part of [Solidbank].8 The Courts Ruling The petition has merit. The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account.9 Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing. The three promissory notes between Solidbank and Permanent all contain the following provisions: 5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent. 6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment. The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbanks written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates.

In order that obligations arising from contracts may have the force of law between the parties, there must be a mutuality between the parties based on their essential equality.10 A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void.11 There was no showing that either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by the parties. Moreover, Solidbanks range of lending rates were consistent with "prevailing rates in the local or international capital markets." Permanent presented a tabulation12 of the range of Solidbanks lending rates, as reported to Bangko Sentral ng Pilipinas and compared the lending rates with the interest rates charged by Solidbank on Permanents loans, thus: Solidbanks range of lending rates as per BSP records High Low Interest rates charged by Solidbank on Permanents loans Excess Interest Rate Over the Average of High and Low Rates

Dec. 12, 1997 Dec. 17, 1997 Dec. 22, 1997 Jan. 12, 1998 Jan. 16, 1998 Jan. 22, 1998 Feb. 9, 1998 Feb. 11, 1998 Feb. 12, 1998

25.0%

23.0%

26.0%

2.0%

25.0%

23.0%

34.0%

10.0%

25.0%

23.0%

32.0%

8.0%

26.0%

24.0%

30.0%

5.0%

28.0%

25.0%

30.0%

3.5%

28.0%

25.0%

30.0%

3.5%

27.0%

24.0%

30.0%

3.5%

27.0%

24.0%

29.0%

4.5%

27.0%

24.0%

30.0%

4.5%

Sept. 12, 1997 Sept. 17, 1997 Sept. 22, 1997 Oct. 13, 1997 Oct. 17, 1997 Oct. 22, 1997 Nov. 12, 1997 Nov. 17, 1997 Nov. 21, 1997

25.0%

22.0%

23.0%

27.0%

24.0%

24.0%

26.0%

23.0%

22.5%

29.0%

26.0%

28.0%

The repriced interest rates from 12 September to 21 November 1997 conformed to the range of Solidbanks lending rates to other borrowers. The 12 December 1997 to 12 February 1998 repriced interest rates were not unconscionably out of line with the upper range of lending rates to other borrowers. The interest rate repricing happened at the height of the Asian financial crises in late 1997, when banks clamped down on lendings because of higher credit risks across industries, particularly the real estate industry. We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather verbally advised Permanents officers over the phone at the start of the period. Solidbank did not present any written memorandum to support its allegation that it promptly advised Permanent of the change in interest rates.13 Solidbank advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had begun. Permanent presented a tabulation which showed that Solidbank either did not send a billing statement, or sent a billing statement 6 to 33 days late.14 We reproduce the tabulation below: PN #435 P19.6MM Referenc e No. Interest Period Date Billing Statemen ts were faxed to Permane Number of days Billing Stateme nt was Late

30.0%

27.0%

30.0%

32.0%

29.0%

30.0%

28.0%

25.0%

27.0%

28.0%

25.0%

27.0%

27.0%

24.0%

27.0%

nt 1 2 03/20/9 7 04/18/9 7 05/19/9 7 04/18/9 7 05/19/9 7 06/19/9 7 04/17/97 05/16/97 28 28 no stateme nt received 07/12/97 08/05/97 09/10/97 10/06/97 11/11/97 12/12/97 01/09/98 02/18/98 23 18 23 19 25 25 23 33 10 11 5 6 7 12 9 PN #969 P18MM Referenc e No. Interest Period Date Billing Statemen ts were faxed to Permane nt 07/12/97 08/05/97 09/10/97 10/06/97 11/11/97 12/12/97 01/09/98 Number of days Billing Stateme nt was Late 18 12 19 14 20 21 18 13 14

01/22/9 8

02/12/9 7

no stateme nt received 02/18/98 6

02/12/9 8

02/20/9 8

PN #1077 P3.9MM Referenc e No. Interest Period Date Billing Statemen ts were faxed to Permane nt 08/14/97 08/26/97 09/10/97 10/06/97 11/11/97 12/10/97 01/09/98 02/09/98 Number of days Billing Stateme nt was Late 30 12 15 24 29 28 28 28 no stateme nt received 02/18/98 7

3 4 5 6 7 8 9 14

06/19/9 7 07/18/9 7 08/18/9 7 09/17/9 7 10/17/9 7 11/17/9 7 12/17/9 7 01/16/9 8

07/18/9 7 08/18/9 7 09/17/9 7 10/17/9 7 11/17/9 7 12/17/9 7 01/16/9 8 02/20/9 8

07/15/9 7 08/14/9 7 08/26/9 7 09/12/9 7 10/13/9 7 11/12/9 7 12/12/9 7 01/12/9 8 02/09/9 8

08/14/9 7 08/26/9 7 09/12/9 7 10/13/9 7 11/12/9 7 12/12/9 7 01/12/9 8 02/09/9 8 02/11/9 8

3 4 5 6 7 8 9

06/24/9 7 07/24/9 7 08/22/9 7 09/22/9 7 10/22/9 7 11/21/9 7 12/22/9 7

07/24/9 7 08/22/9 7 09/22/9 7 10/22/9 7 11/21/9 7 12/22/9 7 01/22/9 8

14

02/11/9 8

03/13/9 8

We rule that Solidbanks computation of the interest due from Permanent should be adjusted to take effect only upon Permanents receipt of the written notice from Solidbank.1avvphi1 WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of Appeals promulgated on 29 June 2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRMthe decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July 2002 in Civil Case No. 98-654 with the MODIFICATION that the repricing of the interest rates should take effect only upon Permanent Homes, Incorporateds receipt of the written notice from Solidbank Corporation of the adjustment in interest rate. The records of this case are therefore remanded to the trial court for the computation of the proper interest payments based on the dates of receipt of written notice. SO ORDERED.

PART IV: DEPOSIT (Articles 1962-2009) I. Deposit in General and its Different Kinds G.R. No. L-66826 August 19, 1988 BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents. Pacis & Reyes Law Office for petitioner. Ernesto T. Zshornack, Jr. for private respondent. CORTES, J.: The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case. Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as modified, read: IN VIEW OF THE FOREGOING, the Court renders judgment as follows: 1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central Bank Circular 343; 2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately upon the finality of this decision, without interest for the reason that the said amount was merely held in custody for safekeeping, but was not actually deposited with the defendant COMTRUST because being cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff upon demand; xxx xxx xxx 5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the concept of litigation expenses and attorney's fees suffered by plaintiff as a

result of the failure of the defendant restore to his (plaintiffs) account the of U.S. $1,000.00 and to return (plaintiff) the U.S. $3,000.00 cash safekeeping. Costs against defendant COMTRUST. SO ORDERED. [Rollo, pp. 47-48.]

bank to amount to him left for

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with regard to the first and second causes of action and its liability for damages. 1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current account. On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 254109, the savings account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft. On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109. When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto. Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account. In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso current account, why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy. As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109. 2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) forsafekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made part of the complaint. The document reads: Makati Cable Address: Philippines "COMTRUST" COMMERCIAL BANK AND TRUST COMPANY of the Philippines Quezon City Branch December 8, 1975 MR. RIZALDY T. ZSHORNACK &/OR MRS SHIRLEY E. ZSHORNACK Sir/Madam: We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping. It was also alleged in the complaint that despite demands, the bank refused to return the money. In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion rates. It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the above instrument. During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976

and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia. Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be considered. The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which document was attached to the complaint. In short, the second cause of action was based on an actionable document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in question. In the past, this Court had occasion to explain the reason behind this procedural requirement. The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted ... Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the

plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).] Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any created existence with which we are acquainted. The distinction between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.] Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct nature of the contract, and its legal consequences, including its enforceability. The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The circular provides: xxx xxx xxx 2. Transactions in the assets described below and all dealings in them of whatever nature, including, where applicable their exportation and importation, shall NOT be effected, except with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned by and in the name of, banks.

(a) Any and all assets, provided they are held through, in, or with banks or banking institutions located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit accounts (demand, time and savings), all debts, indebtedness or obligations, financial brokers and investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security, expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines; (b) Any and all assets of the kinds included and/or described in subparagraph (a) above, whether or not held through, in, or with banks or banking institutions, and existent within the Philippines, which belong to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation not residing or located within the Philippines; (c) Any and all assets existent within the Philippines including money, checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by bankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security expressed in foreign currencies, or if payable abroad, irrespective of the currency

in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines. xxx xxx xxx 4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation shall be sold to the authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation, residing or located within the Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, further, That within one day upon taking ownership, or receiving payment, of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to designated agents of the Central Bank. xxx xxx xxx 8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation, foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the Central Bank Act. xxx xxx xxx Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides: SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any resident person, firm,

company or corporation residing or located within the Philippines, who acquires foreign exchange shall not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within one business day upon taking ownership or receiving payment of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. We thus rule that Zshornack cannot recover under the second cause of action. 3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and attorney's fees to be reasonable. The award is sustained. WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed. SO ORDERED.

II. Voluntary Deposit G.R. No. 120528 January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner, vs. COURT OF APPEALS and DR. PABLO U. ABELLA, respondents. QUISUMBING, J.: Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the decision of the Court of Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the Regional Trial Court of Cebu, Branch 11, declaring private respondent as the lawful possessor of a tractor subject of a replevin suit and ordering petitioner to pay private respondent actual damages and attorney's fees. The facts of the case, as summarized by respondent court, are undisputed. "on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased an MF 210 agricultural tractor with Serial No. 00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which he used in his farm in Dagohoy, Bohol. Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for residential purpose the house of defendant-appellant Dionosio R. Calibo, Jr., in Tagbilaran City. In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the house he was leasing from Calibo. Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals therefor, but beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never paid the charges for electric and water consumption in the leased premises which the latter was duty-bound to shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills. During this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only until the end of December 1986. Mike also assured Calibo that he would be settling his account with the latter, offering the tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he could sooner pay his outstanding obligation.1wphi1.nt In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved to the garage of his father's house, also in Tagbilaran City. Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address in January, February and March, 1987 and tried to collect payment. On all three occasions, Calibo was unable to talk to Mike as the latter was reportedly out of town. On his third

trip to Cebu City, Calibo left word with the occupants of the Abella residence thereat that there was a prospective buyer for the tractor. The following week, Mike saw Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale, however, did not push through as the buyer did not come back anymore. When again confronted with his outstanding obligation, Mike reassured Calibo that the tractor would stand as a guarantee for its payment. That was the last time Calibo saw or heard from Mike. After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as security for the payment of Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he would accept the P2,000.00-check only if the latter would execute a promissory note in his favor to cover the amount of the unpaid electric and water bills. Pablo was not amenable to this proposal. The two of them having failed to come to an agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of the tractor."1 On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the tractor and seeking to recover possession thereof from petitioner. As adverted to above, the trial court ruled in favor of private respondent; so did the Court of Appeals when petitioner appealed. The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged the subject tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the tractor. Respondent court also rejected petitioner's contention that, if not a pledge, then a deposit was created. The Court of Appeals said that under the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in this case, securing payment of a debt. The Court of Appeals reduced the amount of actual damages payable to private respondent, deducting therefrom the cost of transporting the tractor from Tagbilaran, Bohol, to Cebu City. Hence, this petition. Essentially, petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner asserts that the tractor was left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike Abella pays his obligations. Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent relationship may be implied between Mike Abella and private respondent. He contends that the latter failed to repudiate the alleged agency, knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner. Petitioner argues that, under Article 1911 of the Civil Code, private respondent is bound by the pledge, even if

it were beyond the authority of his son to pledge the tractor, since he allowed his son to act as though he had full powers. On the other hand, private respondent asserts that respondent court had correctly ruled on the matter. In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in that of a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: (1) the pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the absolute owner of the thing pledged; and (3) the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.2 As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father, private respondent, who left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the absolute owner of the property, is absent in this case. Hence, there is no valid pledge. "He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or mortgaged."3 There also does not appear to be any agency in this case. We agree with the Court of Appeals that: "As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know that another person is acting on his behalf without authority. Here, appellee categorically stated that the only purpose for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and definitely not for him to pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to appellant, then Mike was acting not only without appellee's authority but without the latter's knowledge as well. Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. Again, in view of appellee's lack of knowledge of Mike's pledging the tractor without any authority from him, it stands to reason that the former could not have allowed the latter to pledge the tractor as if he had full powers to do so."4 There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and of returning the same.5 Petitioner himself states that he received the tractor not to safely keep it but as a form of security for the payment of Mike Abella's obligations. There is no deposit where the principal purpose for receiving the object is not safekeeping.6

Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the other hand, private respondent, as owner, had every right to seek to repossess the tractor, including the institution of the instant action for replevin.1wphi1.nt We do not here pass upon the other assignment of errors made by petitioner concerning alleged irregularities in the raffle and disposition of the case at the trial court. A petition for review on certiorari is not the proper vehicle for such allegations. WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No. 39705 is AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.

G.R. No. 142591

April 30, 2003

Petitioners, however, told them that Moreman withdrew those construction materials in 1977. Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an action for damages with an application for a writ of preliminary attachment against petitioners,7 docketed as Civil Case No. 53044. In the meantime, on October 30, 1986, respondent was appointed Judge of the Regional Trial Court, Branch 12, San Jose Antique.8 On August 25, 1989, or after almost four (4) years, the trial court dismissed respondent's complaint for his failure to prosecute and for lack of interest."9 On September 6, 1994, or five years thereafter, respondent filed a motion for reconsideration, but the same was denied in the Order dated September 9, 1994 because of the failure of respondent and his counsel to appear on the scheduled hearing.10 On October 14, 1994, respondent filed a second motion for reconsideration. This time, the motion was granted and the case was ordered reinstated on January 10, 1995, or ten (10) years from the time the action was originally filed.11 Thereafter, summons, together with the copies of the complaint and its annexes, were served on petitioners. On March 2, 1995, counsel for petitioners filed a motion to dismiss on several grounds.12 Respondent, on the other hand, moved to declare petitioners in default on the ground that their motion to dismiss was filed out of time and that it did not contain any notice of hearing.13 On April 27, 1995, the trial court issued an order declaring petitioners in default.14 Petitioners filed with the Court of Appeals a petition for certiorari15 to annul the trial court's order of default, but the same was dismissed in its Order16 dated August 31, 1995. The case reached this Court, and in a Resolution dated October 25, 1995,17 we affirmed the assailed order of the Court of Appeals. On November 29, 1995,18 the corresponding Entry of Judgment was issued. Thus, upon the return of the records to the RTC, Branch 160, Pasig City, respondent was allowed to present his evidence exparte. Upon motion of respondent, which was granted by the trial court in its Order dated April 29, 1996,19 the depositions of his witnesses, namely, Leonardo Conge, Alfredo Maceda and Engr. Damiano Nadera were taken in the Metropolitan Trial Court in Cities, Branch 2, Tacloban City.20 Deponent Leonardo Conge, a labor contractor, testified that on December 14 up to December 24, 1977, he was contracted by petitioner Lily Chan to get bags of cement from the New Gran Hotel construction site and to store the same into the latter's warehouse in Tacloban City. Aside from those bags of cement, deponent also hauled about 400 bundles of steel bars from the same construction site, upon order of petitioners. Corresponding delivery receipts were presented and marked as Exhibits "A", "A-1", "A-2", "A-3" and "A-4".21 Deponent Alfredo Maceda testified that he was respondent's Disbursement and Payroll Officer who supervised the construction and kept inventory of the properties of the New

JOSEPH CHAN, WILSON CHAN and LILY CHAN, petitioners, vs. BONIFACIO S. MACEDA, JR., * respondent. SANDOVAL-GUTIERREZ, J.: A judgment of default does not automatically imply admission by the defendant of the facts and causes of action of the plaintiff. The Rules of Court require the latter to adduce evidence in support of his allegations as an indispensable condition before final judgment could be given in his favor.1 The trial judge has to evaluate the allegations with the highest degree of objectivity and certainty. He may sustain an allegation for which the plaintiff has adduced sufficient evidence, otherwise, he has to reject it. In the case at bar, judicial review is imperative to avert the award of damages that is unreasonable and without evidentiary support. Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the Decision 2 dated June 17, 1999 of the Court of Appeals in CA-G.R. CV No. 57323, entitled "Bonifacio S. Maceda, Jr. versus Joseph Chan, et al.," affirming in toto the Decision3 dated December 26, 1996 of the Regional Trial Court, Branch 160, Pasig City, in Civil Case No. 53044. The essential antecedents are as follows: On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan from the Development Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City. Thereafter, on September 29, 1976, respondent entered into a building construction contract with Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished not later than December 22, 1977. Respondent purchased various construction materials and equipment in Manila. Moreman, in turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of charge. Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on February 1, 1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission and damages against Moreman, docketed as Civil Case No. 113498. On November 28, 1978, the CFI rendered its Decision 4 rescinding the contract between Moreman and respondent and awarding to the latter P445,000.00 as actual, moral and liquidated damages; P20,000.00 representing the increase in the construction materials; and P35,000.00 as attorney's fees. Moreman interposed an appeal to the Court of Appeals but the same was dismissed on March 7, 1989 for being dilatory. He elevated the case to this Court via a petition for review on certiorari. In a Decision5 dated February 21, 1990, we denied the petition. On April 23, 1990,6 an Entry of Judgment was issued. Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the construction materials and equipment which Moreman deposited in their warehouse.

Gran Hotel. While conducting the inventory on November 23, 1977, he found that the approximate total value of the materials stored in petitioners' warehouse was P214,310.00. This amount was accordingly reflected in the certification signed by Mario Ramos, store clerk and representative of Moreman who was present during the inventory.22 Deponent Damiano Nadera testified on the current cost of the architectural and structural requirements needed to complete the construction of the New Gran Hotel.23 On December 26, 1996, the trial court rendered a decision in favor of respondent, thus: "WHEREFORE, foregoing considered, judgment is hereby rendered ordering defendants to jointly and severally pay plaintiff: 1) P1,930,000.00 as actual damages; 2) P2,549,000.00 as actual damages; 3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and attorney's fees of P50,000.00 and to pay the costs. "SO ORDERED." The trial court ratiocinated as follows: "The inventory of other materials, aside from the steel bars and cement is found highly reliable based on first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders that he was assigned with others to guard the warehouse; (Exhs. "M" & "O"); secondly, the inventory (Exh. "C") dated November 23, 1977 shows (sic) deposit of assorted materials; thirdly, that there were items in the warehouse as of February 3, 1978 as shown in the balance sheet of Moreman's stock clerk Jose Cedilla. "Plaintiff is entitled to payment of damages for the overhauling of materials from the construction site by Lily Chan without the knowledge and consent of its owner. Article 20 of the Civil Code provides: 'Art. 20. Every person who contrary to law, willfully or negligently caused damage to another, shall indemnify the latter for the same.' "As to the materials stored inside the bodega of defendant Wilson Chan, the inventory (Exh. "C") show (sic), that the same were owned by the New Gran Hotel. Said materials were stored by Moreman Builders Co., Inc. since it was attested to by the warehouseman as without any lien or encumbrances, the defendants are duty bound to release it. Article 21 of the Civil Code provides: 'Art. 21. Any person who willfully caused loss or injury to another in a manner that is contrary to morals, good customs or public

policy shall compensate the latter for the damage.' "Plaintiff is entitled to payment of actual damages based on the inventory as of November 23, 1977 amounting to P1,930,080.00 (Exhs. "Q" & "Q-1"). The inventory was signed by the agent Moreman Builders Corporation and defendants. "Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400 bundles of steel bars totaling P2,549,000.00 (Exhs. "S" & "S-1"; Exhs. "B" & "B-3"). "Defendants should pay plaintiff moral damages of P150,000.00; exemplary damages of P50,000.00 and attorney's fees of P50,000.00 and to pay the costs. "The claim of defendant for payment of damages with respect to the materials appearing in the balance sheets as of February 3, 1978 in the amount of P3,286,690.00, not having been established with enough preponderance of evidence cannot be given weight."24 Petitioners then elevated the case to the Court of Appeals, docketed as CA-G.R. CV No. 57323. On June 17, 1999, the Appellate Court rendered the assailed Decision25 affirming in toto the trial court's judgment, ratiocinating as follows: "Moreover, although the prayer in the complaint did not specify the amount of damages sought, the same was satisfactorily proved during the trial. For damages to be awarded, it is essential that the claimant satisfactorily prove during the trial the existence of the factual basis thereof and its causal connection with the adverse party's act (PAL, Inc. vs. NLRC, 259 SCRA 459). In sustaining appellee's claim for damages, the court a quo held as follows: 'The Court finds the contention of plaintiff that materials and equipment of plaintiff were stored in the warehouse of defendants and admitted by defendants in the certification issued to Sheriff Borja. x x x 'Evidence further revealed that assorted materials owned by the New Gran Hotel (Exh. "C") were deposited in the bodega of defendant Wilson Chan with a total market value of P1,930,000.00, current price. 'The inventory of other materials, aside from the steel bars and cement, is highly reliable based on first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders; that he was assigned, with others to guard the warehouse (Exhs. M & O); secondly, the inventory (Exh. C) November 23, 1977 shows deposit of assorted materials; thirdly, that there were items in the warehouse as of February 3, 1978, as shown in the balance sheet of Moreman's stock clerk, Jose Cedilla (pp. 6061, Rollo).' "The Court affirms the above findings.

"Well settled is the rule that 'absent any proper reason to depart from the rule, factual conclusions reached by the trial court are not to be disturbed (People vs. Dupali, 230 SCRA 62).' Hence, in the absence of any showing that serious and substantial errors were committed by the lower court in the appraisal of the evidence, the trial judge's assessment of the credibility of the witnesses is accorded great weight and respect (People vs. Jain, 254 SCRA 686). And, there being absolutely nothing on record to show that the court a quo overlooked, disregarded, or misinterpreted facts of weight and significance, its factual findings and conclusions must be given great weight and should not be disturbed on appeal. "WHEREFORE, being in accord with law and evidence, the appealed decision is hereby AFFIRMED in toto." Hence, this petition for review on certiorari anchored on the following grounds: I The Court of Appeals acted with grave abuse of discretion and under a misapprehension of the law and the facts when it affirmed in toto the award of actual damages made by the trial court in favor of respondent in this case. II The awards of moral and exemplary damages of the trial court to respondent in this case and affirmed in toto by the Court of Appeals are unwarranted by the evidence presented by respondent at the ex parte hearing of this case and should, therefore, be eliminated or at least reduced. III The award of attorney's fees by the trial court to respondent in this case and affirmed by the Court of Appeals should be deleted because of the failure of the trial court to state the legal and factual basis of such award." Petitioners contend inter alia that the actual damages claimed by respondent in the present case were already awarded to him in Civil Case No. 11349826 and hence, cannot be recovered by him again. Even assuming that respondent is entitled to damages, he can not recover P4,479,000.00 which is eleven (11) times more than the total actual damages of P365,000.00 awarded to him in Civil Case No. 113498.27 In his comment on the petition, respondent maintains that petitioners, as depositaries under the law, have both the fiduciary and extraordinary obligations not only to safely keep the construction material deposited, but also to return them with all their products, accessories and accessions, pursuant to Articles 1972,28 1979,29 1983,30 and 198831 of the Civil Code. Considering that petitioners' duty to return the construction materials in question has already become impossible, it is only proper that the prices of those construction materials in 1996 should be the basis of the award of actual damages. This is the only way to fulfill the "duty to return" contemplated in the applicable laws.32 Respondent further claims that petitioners must bear the increase in market prices from 1977 to 1996 because liability for

fraud includes "all damages which may be reasonably attributed to the non-performance of the obligation." Lastly, respondent insists that there can be no double recovery because in Civil Case No. 113498,33 the parties were respondent himself and Moreman and the cause of action was the rescission of their building contract. In the present case, however, the parties are respondent and petitioners and the cause of action between them is for recovery of damages arising from petitioners' failure to return the construction materials and equipment. Obviously, petitioners' assigned errors call for a review of the lower court's findings of fact. Succinct is the rule that this Court is not a trier of facts and does not normally undertake the re-examination of the evidence submitted by the contending parties during the trial of the case considering that findings of fact of the Court of Appeals are generally binding and conclusive on this Court.34 The jurisdiction of this Court in a petition for review on certiorari is limited to reviewing only errors of law,35 not of fact, unless it is shown, inter alia, that: (1) the conclusion is a finding grounded on speculations, surmises or conjectures; (2) the inference is manifestly mistaken, absurd and impossible; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are conflicting; and (6) the Court of Appeals, in making its findings went beyond the issues of the case and the same is contrary to the admission of both parties.36 Petitioners submit that this case is an exception to the general rule since both the trial court and the Court of Appeals based their judgments on misapprehension of facts. We agree. At the outset, the case should have been dismissed outright by the trial court because of patent procedural infirmities. It bears stressing that the case was originally filed on December 11, 1985. Four (4) years thereafter, or on August 25, 1989, the case was dismissed for respondent's failure to prosecute. Five (5) years after, or on September 6, 1994, respondent filed his motion for reconsideration. From here, the trial court already erred in its ruling because it should have dismissed the motion for reconsideration outright as it was filed far beyond the fifteen-day reglementary period.37 Worse, when respondent filed his second motion for reconsideration on October 14, 1994, a prohibited pleading,38 the trial court still granted the same and reinstated the case on January 10, 1995. This is a glaring gross procedural error committed by both the trial court and the Court of Appeals. Even without such serious procedural flaw, the case should also be dismissed for utter lack of merit. It must be stressed that respondent's claim for damages is based on petitioners' failure to return or to release to him the construction materials and equipment deposited by Moreman to their warehouse. Hence, the essential issues to be resolved are: (1) Has respondent presented proof that the construction materials and equipment were actually in petitioners' warehouse when he asked that the same be turned over to him? (2) If so, does respondent have the right to demand the release of the said materials and equipment or claim for damages? Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs) who execute them. When

there is no privity of contract, there is likewise no obligation or liability to speak about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action. 39 A depositary is obliged to return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract.40 In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence respondent presented to prove the contract of deposit were the delivery receipts.41 Significantly, they areunsigned and not duly received or authenticated by either Moreman, petitioners or respondent or any of their authorized representatives . Hence, those delivery receipts have no probative value at all. While our laws grant a person the remedial right to prosecute or institute a civil action against another for the enforcement or protection of a right, or the prevention or redress of a wrong,42 every cause of action ex-contractu must be founded upon a contract, oral or written, express or implied. Moreover, respondent also failed to prove that there were construction materials and equipment in petitioners' warehouse at the time he made a demand for their return. Considering that respondent failed to prove (1) the existence of any contract of deposit between him and petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction materials in petitioners' warehouse at the time of respondent's demand to return the same, we hold that petitioners have no corresponding obligation or liability to respondent with respect to those construction materials. Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article 2199 of the Civil Code,43 actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne.44 Considering our findings that there was no contract of deposit between petitioners and respondent or Moreman and that actually there were no more construction materials or equipment in petitioners' warehouse when respondent made a demand for their return, we hold that he has no right whatsoever to claim for damages. As we stressed in the beginning, a judgment of default does not automatically imply admission by the defendant of plaintiff's causes of action. Here, the trial court merely adopted respondent's allegations in his complaint and evidence without evaluating them with the highest degree of objectivity and certainty.

WHEREFORE, the petition is GRANTED. The challenged Decision of the Court of Appeals dated June 17, 1999 is REVERSED and SET ASIDE. Costs against respondent. SO ORDERED. Puno, Panganiban, Corona and Carpio Morales, JJ ., concur.

G.R. No. 102970 May 13, 1993 LUZAN SIA, petitioner, vs. COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents. Asuncion Law Offices for petitioner. Cauton, Banares, Carpio & Associates for private respondent. DAVIDE, JR., J.: The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21 August 1991, 1 reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review oncertiorari under Rule 45 of the Rules Court. Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been rented from the defendant pursuant to a contract denominated as a Lease Agreement. 3 Judgment therein was rendered in favor of the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant, Security Bank & Trust Company, ordering the defendant bank to pay the plaintiff the sum of a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages; b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal expenses. The counterclaim set up by the defendant are hereby dismissed for lack of merit. No costs. SO ORDERED. 4 The antecedent facts of the present controversy are summarized by the public respondent in its challenged decision as follows: The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at its Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein he placed his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes of the

defendant bank at its aforesaid Binondo Branch. During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank's premises, seeped into the safety deposit box leased by the plaintiff and caused, according to the plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff's claim for compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank. The defendant bank denied liability for the damaged stamps collection of the plaintiff on the basis of the "Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic): "9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the safe by any person other than the Renter, his authorized agent or legal representative; xxx xxx xxx "13. The Bank is not a depository of the contents of the safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith." The defendant bank also contended that its contract with the plaintiff over safety deposit box No. 54 was one of lease and not of deposit and, therefore, governed by the lease agreement (Exhs. "A", "L") which should be the applicable law; that the destruction of the plaintiff's stamps collection was due to a calamity beyond obligation on its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff. The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit box be conducted, which was done on December 8, 1988 by its clerk of court in the presence of the parties and their counsels. A report thereon was then submitted on December 12, 1988 (Records, p. 98-A) and confirmed in open court by both parties thru counsel during the hearing on the same date (Ibid., p. 102) stating: "That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the Acting Branch

Manager Jimmy B. Ynion in the presence of the undersigned, plaintiff's and defendant's counsel. Said Safety Box when opened contains two albums of different sizes and thickness, length and width and a tin box with printed word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character." Condition of the above-stated Items "Both albums are wet, moldy and badly damaged. 1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The leaves of the album are attached to every page and cannot be lifted without destroying it, hence the stamps contained therein are no longer visible. 2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its pages can still be lifted. The stamps therein can still be distinguished but beyond restoration. Others have lost its original form. 3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the cover of the box. The condition of the album is the second abovementioned album." 5 The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No. 26737. In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had failed to exercise the required diligence expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moral damages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount of P5,000.00; and (d) dismissing the counterclaim. On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads: WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No costs. 6 In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly executed with SBTC; b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply; c) The following provisions of the questioned lease agreement of the safety deposit box limiting SBTC's liability: 9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the Safe by any person other than the Renter, his authorized agent or legal representative. xxx xxx xxx 13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith. are valid since said stipulations are not contrary to law, morals, good customs, public order or public policy; and d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which were beyond the control of SBTC, caused the damage to the stamp collection; said floods were fortuitous events which SBTC should not be held liable for since it was not shown to have participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its services to secure the assistance of an expert in order to save most of the stamps, but the appellee refused; appellee must then bear the lose under the principle of "res perit domino." Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner filed the instant petition wherein he contends that: I IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.

II THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1"). III THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE PETITIONER. 8 We subsequently gave due course the petition and required both parties to submit their respective memoranda, which they complied with. 9 Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence expected of a bank maintaining such safety deposit box . . . in the light of the environmental circumstance of said safety deposit box after the floods of 1985 and 1986." He argues that such a conclusion is supported by the evidence on record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box in question; it knew that the premises were inundated by floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day , it is safe to conclude that it was also aware of the inundation of the premises where the safety deposit box was located; despite such knowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriate measures to insure the safety and good maintenance of the safety deposit box in question. SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the Court of Appeals, when supported by substantial exidence, are not reviewable on appeal by certiorari. 10 The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity between the factual findings and conclusions of the Court of Appeals and the trial court. 11 Such a disparity obtains in the present case. As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that a contract of lease and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the bank's liability as follows: 9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the Safe by any person other than the Renter, his autliorized agent or legal representative; xxx xxx xxx 13. The bank is not a depository of the contents of the Safe and it has neither the

possession nor the control of the same. The Bank has no interest whatsoever said contents, except as herein provided, and it assumes absolutely no liability in connection therewith. 12 are valid and binding upon the parties. In the challenged decision, the public respondent further avers that even without such a limitation of liability, SBTC should still be absolved from any responsibility for the damage sustained by the petitioner as it appears that such damage was occasioned by a fortuitous event and that the respondent bank was free from any participation in the aggravation of the injury. We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be impressed with merit. In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly rejected the contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code provision on deposit; 14 it is, as We declared, a special kind of deposit. The prevailing rule in American jurisprudence that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit 15 has been adopted in this jurisdiction, thus: In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides: "Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . ."(emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered

into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned contract of lease of the safety deposit box, which read: "13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of the same. "14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in connection therewith." are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit: "8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it." Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open

their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: "With respect to property deposited in a safe-deposit box by a customer of a safedeposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that, of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safedeposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16 It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case. On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No. 9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely seeing to it that only the renter, his authorized agent or his legal representative should open or have access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not bound to exercise diligence of any kind at all. Assayed in the light of Our aforementioned pronouncements in CA Agrolndustrial Development Corp., it is not at all difficult to conclude

that both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the said conditions. Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the stamp collection because the flooding was a fortuitous event and there was no showing of SBTC's participation in the aggravation of the loss or injury. It states: Article 1174 of the Civil Code provides: "Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.' In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada Espaola 17 says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents (sic) 18 the following essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will; (2) it must be impossible to foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the occurrence must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the obligor must be free from any participation in the aggravation of the injury resulting to the creditor." (cited in Servando vs. Phil., Steam Navigation Co.,supra). 19 Here, the unforeseen or unexpected inundating floods were independent of the will of the appellant bank and the latter was not shown to have participated in aggravating damage (sic) to the stamps collection of the appellee. In fact, the appellant bank offered its services to secure the assistance of an expert to save most of the then good stamps but the appelle refused and let (sic) these recoverable stamps inside the safety deposit box until they were ruined. 20 Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however, the public respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence. The facts

constituting negligence are enumerated in the petition and have been summarized in thisponencia. SBTC's negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads: Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages, thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in the language of the trial court, the "product of 27 years of patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be compensated therefor. We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the relationship between the petitioner and SBTC is based on a contract, either of them may be held liable for moral damages for breach thereof only if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on the part of SBTC. WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral damages which is hereby set aside. Costs against the private respondent. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur.

G.R. No. 90027 March 3, 1993 CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Dolorfino & Dominguez Law Offices for petitioner. Danilo B. Banares for private respondent. DAVIDE, JR., J.: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? This is the crux of the present controversy. On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 1 After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a

deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382. In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4 In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint. On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees. With costs against plaintiff. 6 The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties. Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8 In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the possession nor

control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides: Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the property leased during the period of the contract and Article 1975 of the Civil Code which provides: Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes. and then concluded that "[c]learly, the defendantappellee is not under any duty to maintain the contents of the box. The stipulation absolving the defendantappellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question: 8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13 Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the Philippines. 16 Accordingly, it is claimed that the respondent Bank

is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides: Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing rule in the United States, to wit: The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted). and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire. Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not

contrary to law, morals, good customs, public order or public policy. After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to simultaneously submit their respective Memoranda. The petition is partly meritorious. We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted) In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . . 24 (emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 28 are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit: 8. The Bank shall use due diligence that no unauthorized person shall be admitted to any

rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29 Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: With respect to property deposited in a safedeposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted) Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified. WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit. No pronouncement as to costs. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur. Gutierrez, Jr., J., is on leave.

G.R. Nos. L-26948 and L-26949

October 8, 1927

SILVESTRA BARON, plaintiff-appellant, vs. PABLO DAVID, defendant-appellant. And GUILLERMO BARON, plaintiff-appellant, vs. PABLO DAVID, defendant-appellant. Jose Gutierrez David for plaintiff-appellant in case of No. 26948. Gregorio Perfecto for defendant-appellant in both cases. Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiffappellant in case No. 26949. STREET, J.: These two actions were instituted in the Court of First Instance of the Province of Pampanga by the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the purpose of recovering from the defendant, Pablo David, the value of palay alleged to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact that the defendant is the same in both cases and that the two cases depend in part upon the same facts, the cases were heard together in the trial court and determined in a single opinion. The same course will accordingly be followed here. In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to recover of the defendant the sum of P5,238.51, with costs. From this judgment both the plaintiff and the defendant appealed. In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for him to recover of the defendant the sum of P5,734.60, with costs, from which judgment both the plaintiff and the defendant also appealed. In the same case the defendant interposed a counterclaim in which he asked credit for the sum of P2,800 which he had advanced to the plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and allowed by the trial court. But the defendant also interposed a cross-action against Guillermo Baron in which the defendant claimed compensation for damages alleged to have Ben suffered by him by reason of the alleged malicious and false statements made by the plaintiff against the defendant in suing out an attachment against the defendant's property soon after the institution of the action. In the same cross-action the defendant also sought compensation for damages incident to the shutting down of the defendant's rice mill for the period of one hundred seventy days during which the above-mentioned attachment was in force. The trial judge disallowed these claims for damages, and from this feature of the decision the defendant appealed. We are therefore confronted with five distinct appeals in this record. Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost constantly running. On the date stated a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the actions before us, is an aunt

of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this, in connection with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been received by Silvestra Baron upon account of the palay delivered by Guillermo Baron, he has received from the defendant advancements amounting to P2,800; but apart from this he has not been compensated. Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921, already mentioned. The plaintiff further say that their palay was delivered to the defendant at his special request, coupled with a promise on his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and they say that in August of that year the defendant promised to pay them severally the price of P8.40 per cavan, which was about the top of the market for the season, provided they would wait for payment until December. The trial judge found that no such promise had been given; and the incredulity of the court upon this point seems to us to be justified. A careful examination of the proof, however, leads us to the conclusion that the plaintiffs did, some time in the early part of August, 1920, make demand upon the defendant for a settlement, which he evaded or postponed leaving the exact amount due to the plaintiffs undetermined. It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that when the fire occurred there could not have been more than about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurence of the fire. In the briefs before us it seems to have been assumed by the opposing attorneys that in order for the plaintiffs to recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary, the defendant should prove that the delivery was made in the character of deposit, the defendant should be absolved. But the case does not depend precisely upon this explicit alternative; for even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value.

Under article 1768 of the Civil Code, when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or acommodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely. In view of what has been said it becomes necessary to discover the price which the defendant should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not exactly in agreement with him as to the propriety of the method by which he arrived at this figure, we are nevertheless of the opinion that, all things considered, the result is approximately correct. It appears that the price of palay during the months of April, May, and June, 1920, had been excessively high in the Philippine Islands and even prior to that period the Government of the Philippine Islands had been attempting to hold the price in check by executive regulation. The highest point was touched in this season was apparently about P8.50 per cavan, but the market began to sag in May or June and presently entered upon a precipitate decline. As we have already stated, the plaintiffs made demand upon the defendant for settlement in the early part of August; and, so far as we are able to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the defendant should be required to settle as of that date. It was the date of the demand of the plaintiffs for settlement that determined the price to be paid by the defendant, and this is true whether the palay was delivered in the character of sale with price undetermined or in the character of deposit subject to use by the defendant. It results that the plaintiffs are respectively entitle to recover the value of the palay which they had placed with the defendant during the period referred to, with interest from the date of the filing of their several complaints. As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and he held that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the plaintiffs their respective proportionate shares of this amount of palay. We are unable to see the propriety of this feature of the decision. There were many customers of the defendant's rice mill who had placed their palay with the defendant under the same conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did not belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The assignments of error of each of the plaintiffs-appellants in which this feature of the decision is attacked are therefore well taken; and the appealed judgments must be modified by eliminating the deductions which the trial court allowed from the plaintiffs' claims. The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167 cavans of palay, as indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These exhibits relate to transactions that occurred nearly two years after the transactions with which we are here concerned, and they were offered in evidence merely to show the character of

subsequent transactions between the parties, it appearing that at the time said exhibits came into existence the defendant had reconstructed his mill and that business relations with Guillermo Baron had been resumed. The transactions shown by these exhibits (which relate to palay withdrawn by the plaintiff from the defendant's mill) were not made the subject of controversy in either the complaint or the cross-complaint of the defendant in the second case. They therefore should not have been taken into account as a credit in favor of the defendant. Said credit must therefore be likewise of course be without prejudice to any proper adjustment of the rights of the parties with respect to these subsequent transactions that they have heretofore or may hereafter effect. The preceding discussion disposes of all vital contentions relative to the liability of the defendant upon the causes of action stated in the complaints. We proceed therefore now to consider the question of the liability of the plaintiff Guillermo Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the defendant seek, as the stated in the third paragraph of this opinion, to recover damages for the wrongful suing out of an attachment by the plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and one-half months after said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be issued against the property of the defendant; and to procure the issuance of said writ the plaintiff made affidavit to the effect that the defendant was disposing, or attempting the plaintiff. Upon this affidavit an attachment was issued as prayed, and on March 27, 1924, it was levied upon the defendant's rice mill, and other property, real and personal. 1awph!l.net Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy. Operations were not resumed until September 13, 1924, when the attachment was dissolved by an order of the court and the defendant was permitted to resume control. At the time the attachment was levied there were, in the bodega, more than 20,000 cavans of palay belonging to persons who held receipts therefor; and in order to get this grain away from the sheriff, twenty-four of the depositors found it necessary to submit third-party claims to the sheriff. When these claims were put in the sheriff notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise the grain would be released. The plaintiff, being unable or unwilling to give this bond, the sheriff surrendered the palay to the claimants; but the attachment on the rice mill was maintained until September 13, as above stated, covering a period of one hundred seventy days during which the mill was idle. The ground upon which the attachment was based, as set forth in the plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his property for the purpose of defrauding the plaintiff. That this allegation was false is clearly apparent, and not a word of proof has been submitted in support of the assertion. On the contrary, the defendant testified that at the time this attachment was secured he was solvent and could have paid his indebtedness to the plaintiff if judgment had been rendered against him in ordinary course. His financial conditions was of course well known to the plaintiff, who is his uncle. The defendant also states that he had not conveyed away any of his property, nor had intended to do so, for the purpose of defrauding the plaintiff. We have before us therefore a case of a baseless attachment, recklessly sued out upon a false affidavit and levied upon the defendant's property to his great and needless damage. That the act of the plaintiff in suing out the writ was wholly unjustifiable is perhaps also indicated in the circumstance that the attachment was finally dissolved upon the motion of the plaintiff himself.

The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay per day, producing 225 cavans of rice of 57 kilos each. The price charged for cleaning each cavan rice was 30 centavos. The defendant also stated that the expense of running the mill per day was from P18 to P25, and that the net profit per day on the mill was more than P40. As the mill was not accustomed to run on Sundays and holiday, we estimate that the defendant lost the profit that would have been earned on not less than one hundred forty work days. Figuring his profits at P40 per day, which would appear to be a conservative estimate, the actual net loss resulting from his failure to operate the mill during the time stated could not have been less than P5,600. The reasonableness of these figures is also indicated in the fact that the twenty-four customers who intervened with third-party claims took out of the camarin 20,000 cavans of palay, practically all of which, in the ordinary course of events, would have been milled in this plant by the defendant. And of course other grain would have found its way to this mill if it had remained open during the one hundred forty days when it was closed. But this is not all. When the attachment was dissolved and the mill again opened, the defendant found that his customers had become scattered and could not be easily gotten back. So slow, indeed, was his patronage in returning that during the remainder of the year 1924 the defendant was able to mill scarcely more than the grain belonging to himself and his brothers; and even after the next season opened many of his old customers did not return. Several of these individuals, testifying as witnesses in this case, stated that, owing to the unpleasant experience which they had in getting back their grain from the sheriff to the mill of the defendant, though they had previously had much confidence in him. As against the defendant's proof showing the facts above stated the plaintiff submitted no evidence whatever. We are therefore constrained to hold that the defendant was damaged by the attachment to the extent of P5,600, in profits lost by the closure of the mill, and to the extent of P1,400 for injury to the good-will of his business, making a total of P7,000. For this amount the defendant must recover judgment on his crosscomplaint. The trial court, in dismissing the defendant's crosscomplaint for damages resulting from the wrongful suing out of the attachment, suggested that the closure of the rice mill was a mere act of the sheriff for which the plaintiff was not responsible and that the defendant might have been permitted by the sheriff to continue running the mill if he had applied to the sheriff for permission to operate it. This singular suggestion will not bear a moment's criticism. It was of course the duty of the sheriff, in levying the attachment, to take the attached property into his possession, and the closure of the mill was a natural, and even necessary, consequence of the attachment. For the damage thus inflicted upon the defendant the plaintiff is undoubtedly responsible. One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the sum of P20,000 as damages caused to the defendant by the false and alleged malicious statements contained in the affidavit upon which the attachment was procured. The additional sum of P5,000 is also claimed as exemplary damages. It is clear that with respect to these damages the cross-action cannot be maintained, for the reason that the affidavit in question was used in course of a legal proceeding for the purpose of obtaining a legal remedy, and it is therefore

privileged. But though the affidavit is not actionable as a libelous publication, this fact in no obstacle to the maintenance of an action to recover the damage resulting from the levy of the attachment. Before closing this opinion a word should be said upon the point raised in the first assignment of error of Pablo David as defendant in case R. G. No. 26949. In this connection it appears that the deposition of Guillermo Baron was presented in court as evidence and was admitted as an exhibit, without being actually read to the court. It is supposed in the assignment of error now under consideration that the deposition is not available as evidence to the plaintiff because it was not actually read out in court. This connection is not well founded. It is true that in section 364 of the Code of Civil Procedure it is said that a deposition, once taken, may be read by either party and will then be deemed the evidence of the party reading it. The use of the word "read" in this section finds its explanation of course in the American practice of trying cases for the most part before juries. When a case is thus tried the actual reading of the deposition is necessary in order that the jurymen may become acquainted with its contents. But in courts of equity, and in all courts where judges have the evidence before them for perusal at their pleasure, it is not necessary that the deposition should be actually read when presented as evidence. From what has been said it result that judgment of the court below must be modified with respect to the amounts recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to the disposition of the cross-complaint interposed by the defendant in case R. G. No. 26949, with the following result: In case R. G. No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the sum of P6,227.24, with interest from November 21, 1923, the date of the filing of her complaint, and with costs. In case R. G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David the sum of P8,669.75, with interest from January 9, 1924. In the same case the defendant Pablo David, as plaintiff in the cross-complaint, will recover of Guillermo Baron the sum of P7,000, without costs. So ordered. Avancea, C.J., Johnson, Malcolm, Villamor, Romualdez and VillaReal, JJ., concur.

G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET AL., defendants-appellants. R. Zaldarriaga for appellants. B. Montinola for appellee. TORRES, J.: The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full payment should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay the costs of the proceedings. Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the plaintiff reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo Lim. That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages. A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants answered the original complaint before its amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but on account of the principal, and denied that there had been any agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the complaint, and also denied all the other statements contained therein. As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the complaint, the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book having been made of record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of the sum of P5,714.44 and costs. The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was also excepted to by them; the bill of exceptions presented by the appellants having been approved, the same was in due course submitted to this court. The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan. Article 1767 of the Civil Code provides that The depository can not make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages. Article 1768 also provides that When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven. When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return the amount

deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit; and the creditor, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the amount stated as having bee deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document, Exhibit 1. If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established, such is not the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and the defendants, who call themselves creditors for the said amount have not proven in a satisfactory manner that the plaintiff had received partial payments on account of the same; the latter alleges with good reason, that they should produce the receipts which he may have issued, and which he did issue whenever they paid him any money on account. The plaintiffs allegation that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in evidence by the defendants, had been received from Ceferino Domingo Lim on account of other debts of his, has not been contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on account of interest on the amount deposited according to documents No. 2 and letter "B" above referred to, was due to a mistake. Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or proven in the proceedings that the creditor had released Joe Lim from complying with his obligation in order that he should not be sued for or sentenced to pay the amount of capital and interest together with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory evidence against the pretension of Jose Lim, and it further appears that document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on

behalf of Jose Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet been settled, took steps to secure an extension of the time for payment, and consented to pay interest in return for the concession requested from the creditor. In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the same should be and is hereby affirmed with the costs of this instance against the appellant, provided that the interest agreed upon shall be paid until the complete liquidation of the debt. So ordered. Arellano, C.J., Carson, Willard and Tracey, JJ., concur.

G.R. No. L-32778

November 14, 1930

P3,000 to Felix Pardo de Tavera. The agreement between them read as follows (translation): Received of Seorita Ignacia de Gorricho the sum of 3,000 pesos, gold (3,000 pesos), as a deposit payable on two months' notice in advance, with interest at 6 percent per annum with a hypothecation of the goods now owned by me or which may be owned hereafter, as security of the payment. In witness whereof I sign in Binondo, January 31, 1859. FELIX PARDO DE TAVERA After the death of both parties, Gavieres, as plaintiff and successor in interest of the deceased Ignacia de Gorricho, brought the action against Trinidad H. Pardo de Tavera, the successor in interest of the deceased Felix Pardo de Tavera, for the collection of the sum of P1,423.75, the remaining portion of the 3,000 pesos. The plaintiff Gavieres alleged that the money was delivered to Felix Pardo de Tavera as a deposit, but the defendant insisted that the agreement above quoted was not a contract of deposit but one of loan. This court said: Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties. It is unnecessary to recur to the cannons of interpretation to arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depository should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Art. 1768, Civil Code.) In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through Justice Torres said: Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907; it was then alleged, that on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the plaintiff reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six pesos and fifty-eight cents of pesos fuertes, which we will return to the said gentleman, jointly and severally on the 20th of January, 1898. Jaro, 26th of May 1879. Signed: JOSE LIM. Signed: CEFERINO DOMINGO LIM. That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof binding themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of 1,000 pesos, with the exception

Involuntary insolvency of Mariano Velasco and Co., et al. COMPAIA AGRICOLA DE ULTRAMAR, claimant-appellee, vs. VICENTE NEPOMUCENO, assignee-appellant. OSTRAND, J.: It appears from the record that on March 17, 1927, the registered partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the creditors, declared insolvent by the Court of First Instance of Manila. On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co. and asked the court to declare it a preferred claim. The assignee of the insolvency answered the claim by interposing a general denial. The claim was thereupon referred by the court to a Commissioner to receive the evidence, and on September 23, 1929, the court rendered a decision declaring that the alleged deposit was a preferred claim for the sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision the assignee appealed. The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was executed. The receipt reads as follow (translation): MANILA, P. I., April 5, 1918. Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a deposit at the interest of six per cent annually, for the term of three months from date. In witness thereof, I sign the present. MARIANO VELASCO & CO. By (Sgd.) JOSE VELASCO Manager. P10,000.00. In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he received the said sum of P10,000 from the appellee and deposited it with the bank in the current account of Mariano Velasco & Co. In our opinion the court below erred in finding that the claim of the appellee should be considered a deposit and a preferred claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very similar to the present case, this court held that the transaction therein involved was a loan and not a deposit. The facts of the case were that in 1859 Ignacia de Gorricho delivered

of which they had not paid any other sum on account of either capital or interest, notwithstanding the requests made by the plaintiff, who had thereby been subjected to loss and damages. xxx xxx xxx xxx

loses the character of a deposit and becomes a loan or bailment." "The permission not be presumed, and its existence must be proven." xxx xxx

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibit 2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902 that the amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors paid the creditor the said amount in full. In this second document the contract between the parties, which is a real loan of money with interest, appears perfectly defined, notwithstanding the fact that in the original document executed by the debtors on the 26th of May, 1897, it is called a deposit; so that when they bound themselves jointly and severally to refund the sum of 2,686.58 pesos to the depositor, Javellana, they did not engage to return the same coins received and of which the amount deposited consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequently shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the lender, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered in to between the interested parties was not a deposit, but a real contract of loan. Article 1767 of the Civil Code provides that "The depository cannot make use of the thing deposited without the express permission of the depositor." "Otherwise he shall be liable for losses and damages." Article 1768 also provides that "When the depository has permission to make use of the thing deposited, the contract

Moreover, for the reasons above set forth it may, as a matter of course, be inferred that there was no renewal of the contract of deposit converted into a loan, because, as has already been stated, the defendants received said amount by virtue of a real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The two cases quoted are sufficient to show that the ten thousand pesos delivered by the appellee to Mariano Velasco & Co. cannot de regarded as a technical deposit. But the appellee argues that it is at least an "irregular deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said: . . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the essential cause for the transaction is the necessity of the borrower. The contract in question does not fulfill this requirement of an irregular deposit. It is very apparent that it was not for the sole benefit of Rogers. It, like any other loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co. received was the use of the money; the benefit which Rogers received was the interest on his money. In the letter in which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the interest, they said: "We call your attention to this matter in order that you may if you think best employ your money in some other place." Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this documents that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment. In the present case the transaction in question was clearly not for the sole benefit of the Compania Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged depositor demand payment until the expiration of the term of three months. For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question must be regarded as a loan, without preference. Without costs. So ordered.

G.R. No. L-4347

March 9, 1908

judgment was ordered in their favor, from which judgment the plaintiff has appealed. The facts in the case are disputed. When this document was delivered 12,000 pesos in silver were worth more than 12,000 pesos in gold. the plaintiff delivered to the defendants in consideration of the execution of the document 12,000 in gold. Soon thereafter the plaintiff removed to Barcelona and has since resided there. The defendants remitted the interest to him every three months at the rate of 8 per cent per annum until the 30th day of January, 1888, when they notified him that thereafter the interest would be 6 per cent. The plaintiff accepted this reduction and interest at that rate was remitted to him by the defendants until the 10th of February, 1904. This interest was remitted in silver; that is to say, every three months the defendants took 180 pesos in silver and with it bought exchange on Barcelona or other European point converted into pesetas. The plaintiff received this payments in silver without any protest whatever until the 10th day of February, 1904. He then, in his letter of that date, called the attention of the defendants to the fact that by the new American law in force in the Philippines the gold standard had been introduced and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that when he delivered the money to the defendants in 1876 he delivered it in gold coin. In another letter of the 15th of December, 1904, he expressly refers to the act of Congress of March 2, 1903, and to the subsequent proclamations of the Governor-General relating to coinage. These are practically all the fat in the case, and the claim of the plaintiff is that, having paid to the defendants 12,000 pesos in gold coin, he is now entitled to receive from them the value of 12,000 pesos in gold coin; that is to say, 24,000 pesos in silver. It is necessary to determine in the first place the nature of the contract evidenced by the document of the 17th of February, 1876. The important, and to our minds decisive, question in the case is, whether or not this document is evidence of an ordinary loan which created between the plaintiff and the defendants the simple relation of debtor and creditor. The appellant in his brief repeatedly calls it a deposit, but we do not understand that he claims that it is or ever was a deposit in the technical sense of the term; that is, that he ownership of the particular coin which was delivered by him to Smith, Bell & Co. did not pass to Smith, Bell & Co. but remained in him and that Smith, Bell & Co. was bound to return to him the identical coin which they had received. It is apparent that no such claim could be maintained in view of that part of the instrument which provides for the payment of interest. It is claimed, however, by the appellant, that while not a deposit in the strict sense of the word, the document evidences what is known as an "irregular deposit." The parties agree that the case must be decided in this respect in view of the legislation in force prior to the adoption of the Civil Code, and the appellant says that the definition of an irregular deposit is found in Law II, Title III of the Fifth Partida. Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in loan the essential cause for the transaction is the necessity of the borrower. The contract in question does not fulfill this requirement of an irregular deposit. It is very apparent that is was not for the sole benefit of Rogers. It, like any other

JOSE ROGERS, plaintiff-appellant, vs. SMITH, BELL, & CO., defendants-appellees. Chicote and Miranda for appellant. Kinney and Lawrence for appellees. WILLARD, J.: The plaintiff brought this action in the Court of First Instance of the city of Manila upon the following document: No. 1418. $12,000. The sum of pesos twelve thousand has been deposited with us, received from Jose Rogers, which sum we will pay on the last day of the six months after the presentation of this document, to the order of Mr. Jose Rogers. Manila, February 17, 1876. SMITH, BELL & CO. The said sum of twelve thousand pesos shall bear interest at the rate of eight per centum (8%) per annum from this date, February 17, 1876. SMITH, BELL & CO. When this document was delivered by the defendants to the plaintiff the former delivered to the latter the following letter: MANILA, 17 February, 1876. JOSE ROGERS, Esq., Present. DEAR SIR: We have this day signed a receipt (quedan No. 1418) in your favor for twelve thousand dollars, deposited in our hands, at interest of 8% per annum, commencing from to-day. This interest will be paid to your order every three months, either in Manila or in London, as you may wish. If at any time you should desire to receive said deposit of twelve thousand dollars in London it will be paid to you, or your order, by Messrs. Smith, Wood and Co., of that place, after two months' notice, and on presentation of said receipt or quedan No. 1418. We are, dear sir, yours, truly, SMITH, BELL & CO. The only question in the case is, whether upon these documents the plaintiff is entitled to recover 12,000 pesos or 24,000 pesos. The court below held that he was entitled to recover only 12,000 pesos, and the defendants having deposited that amount in court,

loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co. received was the use of the money; the benefit which Rogers received was the interest of his money. In the letter which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the interest, they said: "We call your attention to this matter in order that you may if you think best employ your money in some other place." Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and can not seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this document that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment. The second difference which exists, according to Manresa, between an irregular deposit and a loan lies in the fact that in an irregular deposit the depositor has a preference over other creditors in the distribution of the debtor's property. That this preference may exist and the transaction be still a loan, appears from the decision of the supreme court of Spain of the 8th of April, 1881. The court there said: Whereas, although the irregular deposit is considered as mutual, with respect to the repayment between the depositor and the depositary, notwithstanding this, the latter retains the original status of personal creditor and is simply privileged, in concurrence with other creditors against the former, and he must be paid after the mortgage creditors and before the creditors whose right appears only by written instruments, in accordance with Law XII, Title XIV, fifth Partida. It is apparent, therefore, that this document does not state those requisites which are essential to an irregular deposit. But even if it did, it seems that the appellant's contention could not be sustained. He claims that in accordance with said Law II, title III, Fifth Partida, the defendants are bound to return to him the same kind of money which was received. That law is in part as follows: And the ownership of the thing given in deposit is not transferred to the one who receives the same; but, should the thing be one of those which can be counted, weighed, or measured, if, when receiving it, the same were given by count, weight, or measure, then the ownership would be transferred to him. Yet he would be obliged to return the same thing, or the same quantity, or another similar to the one received, to him who gave it to him in deposit. An examination, however, of Law II, Title I, of the Fifth Partida, which relates to loans, will show that the obligation of the borrower in such case is stated in almost exactly the same words. That law is in part as follows: A man may loan to another any of the things mentioned in the last law which are susceptible of being counted, weighed, or measured. And this is understood with regard to things belonging to him who lends them, or which are loaned by another by authority of his

principal; provided, however, that once the thing is in the possession of him who secures the loan, he may dispose of it as though it were his own. But he must return to the owner of the thing equal amount of the same kind and quality, although the creditor should not specify either of the conditions. The supreme court of Spain in the judgment of the 27th of October, 1868, speaking of the obligation of the borrower in such case, says: Whereas the principle in Laws I and II of Title I of the Fifth Partida, according to which the borrower, acquires ownership of the thing and is bound to return an equal amount of the same kind and quality, have special application to cases relating to loans of money or its equivalent; whereas the thing loaned not being in such cases what properly constitutes the material or the object of deposit, as happens with other perishable things, but rather the value that the coins or the paper money represents, the obligation of the depository in this kind of contracts is to return the sum or amount therein expressed, whatever may have been the increase or depreciation suffered by the specific kind of coin or paper, unless the contrary be stipulated. It seems clear from these citations that the document in question is evidence of an ordinary loan and created between the plaintiff and defendants the relation of debtor and creditor. The two judgments of the supreme court of Spain cited by the appellant in his brief have no bearing upon the question. In that of the 9th of July, 1889, it appeared that the Bank of Havana returned to the plaintiff the same kind of money which it had received from him. The other judgment, of the 7th of February, 1891, simply held that a servant who had left her money with her master and had taken a written obligation from him to pay the same was not, in the distribution of his property, entitled to preference over other creditors on the ground that her debt was for personal labor. It having been determined that the contract between the parties created the common relation of debtor and creditor, the case is easily resolved. Section 3 of the act of Congress of March 2, 1903, entitled "An act to establish a standard of value and to provide for a coinage system in the Philippine Islands," is as follows: That the silver Philippine pesos authorized by this act shall be legal tender in the Philippine Islands for all debts, public and private, unless otherwise specifically provided by contract: Provided, That debts contracted prior to the thirty-first day of December, nineteen hundred and three, may be paid in the legal tender currency of said Islands existing at the time of the making of said contracts, unless otherwise expressly provided by contract. That this case falls within the terms of this section is very clear. The debt in question is a private debt, calling for the payment of 12,000 pesos. This section authorizes the payment of that debt in the Philippine pesos authorized by the act. That the act applies as well to debts created prior to its passage as to those created after, appears from the proviso. The effect of that proviso is to give the debtor and not the creditor the option as to the kind of money with which the debt shall be paid.

The only possible way to avoid the application of this section to the case at bar is by saying that Congress had no power to pass the act and that sa to debts created prior to its passage it is therefore null and void. That the act can not be declared void on this ground is well settled by the decisions of the Supreme Court of the United States. (Legal Tender Cases, 12 Wall., 457; Dooley vs. Smith, 13 Wall., 604; Railroad Company vs. Johnson, 15 Wall., 195;; Maryland vs. Railroad Company, 22 Wall., 105 and Julliard vs. Greenman, 110 U. S., 421.) In the first four of those cases it was held that debts created when the only legal-tender money was gold and silver could be paid in paper money issued by the Government and which had no intrinsic value. The appellant in his brief discusses at length the meaning of the word "dollars." We do not see how such a discussion is material. The contract provides for the payment of "pesos," not "dollars." It is very evident that the contract was not changed nor intended to be changed by the use of the word "dollars" in the letter of February 17, 1876. That in English houses especially the word "dollars" was, until very recently, used to indicate pesos of local currency, whether Mexican, Spanish, or Hongkong, is well known. In conclusion it may be said that the plaintiff, in 1876, delivered to the defendants the cheapest kind of money then in use. If he had desired to be repaid in the same money which he delivered, he should have so provided expressly in the contract. He had a perfect right to do so, and if he had done so he could now, by reason of the provisions of the said act of Congress, demand payment in gold. That the plaintiff's protest in 1904 was based entirely upon his construction of this act of Congress admits of no doubt; that he delivered that by the terms of the contract, without the act of Congress, Smith, Bell & Co. had the right to pay him in silver is beyond question. This belief is shown not only by his letters of protest which expressly refer to the act of Congress as the basis of his claim but also by his conduct during more than twenty-five years in receiving interest in silver without a sign of protest. That he would have received the principal also in silver had the defendants tendered it to him at any time prior to 1903 is also free from doubt. In making his protest in 1904 he evidently believed that the act of Congress required the payment of the 12,000 pesos in gold and that he thereby has acquired additional rights. His construction of the act is, as we have seen, wrong. The judgment of the court below is affirmed, with the costs of this instance against the appellant. So ordered. Arellano, C.J., Torres, Mapa, Johnson, Carson, and Tracey, JJ., concur.

G.R. No. 104612 May 10, 1994 BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents. Leonen, Ramirez & Associates for petitioner. Constante A. Ancheta for private respondents. DAVIDE, JR., J.: The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of Appeals in CAG.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with the plaintiff. As culled from the records and the pleadings of the parties, the following facts were duly established: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-ininterest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market. Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General Manager of Eastern, 2 one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3 Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was payable on demand with interest at 14% per annum. For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan is

wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest. And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the non-resolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder. In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. 8 Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 8742967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note. After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the promissory

note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. 12 Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV No. 25739. On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." 14 On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16 The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto. We gave due course to the petition and required the parties to submit simultaneously their memoranda.

The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement. We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-ininterest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. 19 Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal. The "suspensive condition" theory of the petitioner is, therefore, untenable. The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. 22 The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to

pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. 23 Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. 24 Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on the counterclaim is sustained subject to a modification of the interest. WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified: (1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at: (a) 14% per annum on the principal, computed from 18 August 1978 until payment; (b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code.

(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim. No pronouncement as to costs. SO ORDERED. Cruz, Bellosillo, Quiason and Kapunan, JJ., concur

G.R. No. 179952

December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK CORPORATION), Petitioner, vs. BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents. DECISION CARPIO MORALES, J.: Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,2801 loan to secure which, he mortgaged his car to respondent BA Finance.2 The mortgage contained the following stipulation: The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an amount not less than the outstanding balance of mortgage obligations and that he/it will make all loss, if any, under such policy or policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x.3 (emphasis and underscoring supplied) Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance)4which issued a policy stipulating that, inter alia, Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly understood that this policy or any renewal thereof, shall not be cancelled without prior notification and conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring supplied) The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of "B.A. Finance Corporation and Lamberto Bitanga" for P224,500, drawn against China Banking Corporation (China Bank). The check was crossed with the notation "For Deposit Payees Account Only."6 Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check. In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it. BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a crossed check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and withdrawing the entire proceeds thereof. BA Finance thereupon demanded the payment of the value of the check from Asianbank7 but to no avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damagesagainst Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the entire proceeds of the check.

In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if any, is against Malayan [Insurance]."10 Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its personnel to release to him the full amount of the check; and that on being later informed that the entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had changed residence without leaving any forwarding address.12 And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to Bitanga without the consent of BA Finance.14 Bitanga was declared in default in Asianbanks cross-claim.15 Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the financing company, held that Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA Finance and Bitanga. The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of Appeals.17 Thus the trial court disposed: WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank Corporation and Lamberto Bitanga: 1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of 12% from September 25, 1992 until fully paid; 2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages; P30,000.00 as attorneys fee; and 3) To pay the costs of suit. Asianbanks and Bitangas [sic] counterclaims are dismissed. The third party complaint of defendant/third party plaintiff against third-party defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee of P50,000.00 and a per appearance fee of P500.00. On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-mentioned. SO ORDERED.18 (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for consideration: 3.01.1.1 Whether BA Finance has a cause of action against Asianbank. 3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than one-half of the value of the check considering that it is a mere co-payee or joint payee of the check? 3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully bringing the case to court. 3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this Honorable Court may award to BA Finance in this case.19 (underscoring supplied) And it proffered the following arguments: A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check considering that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof under the Negotiable Instruments Law. B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between them. C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary between the payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the consequent damage to BA Finance was due to the negligence of Chinabank. D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the "loss payee" clause in the Policy, is the proximate cause of the alleged damage to BA Finance. E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it is a joint payee thereof. F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio indebiti. G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring supplied) The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be "whetherBA Finance has a cause of action against [it] even if the subject check had not been delivered toBA Finance by the issuer itself," held in the affirmative and accordingly affirmed the trial courts decision but deleted the award ofP20,000 as actual damages.21 Hence, the present Petition for Review on Certiorari 22 filed by Metrobank (hereafter petitioner) to which Asianbank was, as earlier stated, merged, faulting the appellate court I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual similarity and of the

legal relationships necessary for the application of the desirable shortcut rule. x x x II. x x x in not finding that x x x the general rule that the payee has no cause of action against the collecting bank absent delivery to him must be applied. III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against Asianbank Corporation are present. IV. x x x in finding that Article 1208 of the Civil Code is not applicable. V. x x x in awarding of exemplary damages even in the absence of moral, temperate, liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. xxxx VII. x x x in dismissing Asianbanks counterclaim and Third Party complaint [against Malayan Insurance].23(italics in the original; underscoring supplied) Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case: x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee to recover from erring collecting banks despite the absence of delivery of the negotiable instrument. However, the application of the rule demands careful consideration of the factual settings and issues raised in the case x x x. One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized indorsement. x x x In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the representative of BA Finance Corporation. No unauthorized indorsement appears on the check. xxxx Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot be applied,24 (underscoring supplied) The petition fails. Section 41 of the Negotiable Instruments Law provides: Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis and underscoring supplied) Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it on its behalf.25

Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise, however, viz: Q Now, could you be familiar with a particular policy of the bank with respect to checks with joined (sic) payees? A Yes, sir. Q And what would be the particular policy of the bank regarding this transaction? A The bank policy and procedure regarding the joint checks. Once it is deposited to a single account, we are not accepting joint checks for single account, depositing to a single account(sic). Q What happened to the bank employee who allowed this particular transaction to occur? A Once the branch personnel, the bank personnel (sic) accepted it, he is liable. Q What do you mean by the branch personnel being held liable? A Because since (sic) the bank policy, we are not supposed to accept joint checks to a [single] account, so we mean that personnel would be held liable in the sense that (sic) once it is withdrawn or encashed, it will not be allowed. Q In your experience, have you encountered any bank employee who was subjected to disciplinary action by not following bank policies? A The one that happened in that case, since I really dont know who that personnel is, he is no longer connected with the bank. Q What about in general, do you know of any disciplinary action, Madam witness? A Since theres a negligence on the part of the bank personnel, it will be a ground for his separation [from] the bank.26 (emphasis, italics and underscoring supplied) Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas account. Petitioners argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the present case fails. The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement27 or an unauthorized indorsement in itself in the case of joint payees.28 Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone

endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.29 As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and confidence of the public in general in the banking sector.30 Undoubtedly, BA Finance has a cause of action against petitioner. Is petitioner liable to BA Finance for the full value of the check? Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil Code which respectively provide: Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the debts or credits being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. Petitioners argument is flawed. The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law provide definitive justification for petitioners full liability on the value of the check. To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser.[31] This is because in indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase "all prior endorsements and/or lack of endorsement guaranteed"32 and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser.33 Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check. Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements.34

Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the nonindorsing payee for the entire amount of the check.35 It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to return to petitioner the entire value of the check P224,500.00 with interest as well as damages and cost of suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now prays for the modification of its liability to BA Finance to only one-half of said amount. To pander to petitioners supplication would certainly amount to unjust enrichment at BA Finances expense. Petitioners remedywhich is the reimbursement for the full amount of the check from the perpetrator of the irregularity lies with Bitanga. Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected in the instrument and whether the payees would jointly share in the proceeds or not is beside the point. Moreover, granting petitioners appeal for partial liability would run counter to the existing principles on the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments Law which instructs that joint payees who indorse are deemed to indorse jointly and severally.36 Recall that when the maker dishonors the instrument, the holder thereof can turn to those secondarily liable the indorser for recovery.37And since the law explicitly mandates a solidary liability on the part of the joint payees who indorse the instrument, the holder thereof (assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full recompense. Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or compensatory damages were awarded by the trial court,38 the RTC did in fact award compensatory or actual damages of P224,500, the value of the check, plus interest thereon. Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts, the court may award exemplary damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner concludes, there was no finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not liable for exemplary damages. The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but on quasi-delictsince there is no pre-existing contractual relation between the parties.40 Article 2231 of the Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the defendant acted with gross negligence, thus applies. For "gross negligence" implies a want or absence of or failure to exercise even slight care or diligence, or the entire absence of care,41 evincing a thoughtless disregard of consequences without exerting any effort to avoid them.42

x x x The law allows the grant of exemplary damages to set an example for the public good. The business of a bank is affected with public interest; thus it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against in injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors.43(Italics and underscoring supplied) As for the dismissal by the appellate court of petitioners third party complaint against Malayan Insurance, the same is welltaken. Petitioner based its third-party complaint on Malayan Insurances alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA Finance.44 Malayan Insurance countered, however, that it x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance with the decision in the case of "Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8, 1992 x x x.45 (underscoring supplied) It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks in the name of the insured and the financing company, presented a witness to rebut its supposed negligence. 46 Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the check was issued for a definite purpose.47 Petitioner never ever disputed these assertions. The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of legal interest of 12% per annum on the value of the check. For the obligation in this case did not arise out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that: Fixed savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan, said provision does not find application in this case since the nature of the relationship between BA Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA Finance the corresponding proceeds from the check.48 Not being a loan or forbearance of money, the interest should be 6% per annum computed from the date of extrajudicial demand on September 25, 1992 until finality of judgment; and 12% per annum from finality of judgment until payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49] WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION in that the rate of interest on the judgment obligation of P224,500 should be 6% per annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per annum computed from the time the judgment becomes final and executory until fully satisfied. Costs against petitioner. SO ORDERED.

G.R. No. L-60033 April 4, 1984 TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents. MAKASIAR, Actg. C.J.: This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982. On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18, 1983. As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners' obligation is civil in nature. For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment dated June 28,1982, as follows: On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8). In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):t.hqw "From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00

under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00." Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated the following.t.hqw "That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and served as such until October 30, 1980, while Santos was General Manager up to November 1980; that because NSLA was urgently in need of funds and at David's insistence, his investments were treated as special- accounts with interest above the legal rate, an recorded in separate confidential documents only a portion of which were to be reported because he did not want the Australian government to tax his total earnings (nor) to know his total investments; that all transactions with David were recorded except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending transaction with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 821695 in the Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership, Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were civil in nature." Petitioner, Guingona, Jr., in his counteraffidavit (Petition, Annex' C') stated the following:t.hqw

"That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was provided that the mortgage over one (1) parcel shall be cancelled upon payment of onehalf of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land conveyed to David under second mortgages." At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8). But, after the presentation of David's principal witness, petitioners filed the instant petition because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 89). Petitioners alleged that they did not exhaust available administrative remedies because to do so would be futile (Petition, p. 9) [pp. 153157, rec.]. As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 8131938.

There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa. A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.). Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20. Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association. Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association. It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:t.hqw Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:t.hqw It should be noted that fixed, savings, and current deposits of money in banks and

similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)." This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:t.hqw Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied). Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction. WE have already laid down the rule that:t.hqw In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the some money, goods or personal property that he receivedPetitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.t.hqw "Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum. "Commodatum gratuitous. is essentially

"Simple loan may be gratuitous or with a stipulation to pay interest. "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower. "Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied). But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal

information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in the case at bar may convert the relation between the parties into an ordinary creditor-debtor relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true nature" thereof. Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620). It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481). In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal. Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation. Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other related regulations regarding foreign exchange transactions by accepting

foreign currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by respondent David for deposit were all converted into Philippine currency before acceptance and deposit into Nation Savings and Loan Association. Petitioners' contention is worthy of behelf for the following reasons: 1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations. 2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of Court). 3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his case, respondent David should have promptly denied petitioners' allegation. In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice. While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:t.hqw On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by

court prohibition or injunction." Exceptions, however, are allowed in the following instances:t.hqw "1. for the orderly administration of justice; "2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner; "3. to avoid multiplicity of actions; "4. to afford adequate protection to constitutional rights; "5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]). Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621622 [1966]), We held that:t.hqw The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the accused in the case could have appealed in due time from the order complained of, our action in the premises being based on the public welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted, they could have appealed. We gave due course to their petition for the orderly administration of justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended information was sustained despite the availability of appeal at the proper time. WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT. SO ORDERED.

GREGORIO H. REYES and CONSUELO PUYATREYES, petitioners, vs. THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents. DE LEON, JR., J.: Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29, 1994 of the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and Trust Company. The undisputed facts of the case are as follows: In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian dollars. Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did not have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20th Asian Racing Conference. On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank.1wphi1.nt On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD No. 209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank informing the latter that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00)

was debited. On August 19, 1988, in response to PRCI's complaint about the dishonor of the said foreign exchange demand draft, respondent bank informed Westpac-Sydney of the issuance of the said demand draft FXDD No. 209968, drawn against the WespacSydney and informing the latter to be reimbursed from the respondent bank's dollar account in Westpac-New York. The respondent bank on the same day likewise informed WespacNew York requesting the latter to honor the reimbursement claim of Wespac-Sydney. On September 14, 1988, upon its second presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same reason, that is, that the respondent bank has no deposit dollar account with the drawee Wespac-Sydney. On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H. Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to register as a conference delegate. At the registration desk, in the presence of other delegates from various member of the conference secretariat that he could not register because the foreign exchange demand draft for his registration fee had been dishonored for the second time. A discussion ensued in the presence and within the hearing of many delegates who were also registering. Feeling terribly embarrassed and humiliated, petitioner Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject foreign exchange demand draft that had been dishonored as well as the covering letter after which he promised that he would pay the registration fees in cash. In the meantime he demanded that he be given his name plate and conference kit. The lady member of the conference secretariat relented and gave him his name plate and conference kit. It was only two (2) days later, or on September 20, 1988, that he was given the dishonored demand draft and a covering letter. It was then that he actually paid in cash the registration fees as he had earlier promised. Meanwhile, on September 19, 1988, petitioner Consuelo PuyatReyes arrived in Sydney. She too was embarassed and humiliated at the registration desk of the conference secretariat when she was told in the presence and within the hearing of other delegates that she could not be registered due to the dishonor of the subject foreign exchange demand draft. She felt herself trembling and unable to look at the people around her. Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling the secretariat member that he had already arranged for the payment of the registration fee in cash once he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate and conference kit. At the time the incident took place, petitioner Consuelo PuyatReyes was a member of the House of Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her extraordinary service as the Society's campaign chairman for the ninth (9th) consecutive year. On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the dishonor of the said foreign exchange demand draft issued by the

respondent bank. The petitioners claim that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mental anguish in a foreign country, and in the presence of an international audience. On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) and against the plaintiffs (herein petitioners), the dispositive portion of which states: WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of P50,000.00, as reasonable attorney's fees. Costs against the plaintiff. SO ORDERED.5 The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the appellate court affirmed the decision of the trial court but in effect deleted the award of attorney's fees to the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion of the decision of the appellate court states: WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is hereby AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement as to costs. SO ORDERED.6 According to the appellate court, there is no basis to hold the respondent bank liable for damages for the reason that it exerted every effort for the subject foreign exchange demand draft to be honored. The appellate court found and declared that: xxx xxx xxx

to the effect that Westpac-Sydney was responsible for the dishonor and not the Bank. Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of the numbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message sent to Wespac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding the cable message which caused the Bank's message to be sent to the wrong department, the mistake was Westpac's, not the Bank's. The Bank had done what an ordinary prudent person is required to do in the particular situation, although appellants expect the Bank to have done more. The Bank having done everything necessary or usual in the ordinary course of banking transaction, it cannot be held liable for any embarrassment and corresponding damage that appellants may have incurred.7 xxx xxx xxx

Hence, this petition, anchored on the following assignment of errors: I THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT PERSON" WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS. II THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE RESPONDENT'S WARRANTY AS THE DRAWER THEREOF. III THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS DUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8 The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and its clients, the respondent should have exercised a higher degree of diligence than that expected of an ordinary prudent person in the handling of its affairs as in the case at bar. The appellate court, according to petitioners, erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also claim that the respondent bank violate Section 61 of the Negotiable Instruments Law9 which provides the warranty of a drawer that "xxx on due presentment, the instrument will be accepted or paid, or both, according to its tenor xxx." Thus, the petitioners argue that respondent bank should be held liable for damages for violation of this warranty. The petitioners pray this Court to reexamine the facts to cite certain instances of negligence.

Thus, the Bank had every reason to believe that the transaction finally went through smoothly, considering that its New York account had been debited and that there was no miscommunication between it and Westpac-New York. SWIFT is a world wide association used by almost all banks and is known to be the most reliable mode of communication in the international banking business. Besides, the above procedure, with the Bank as drawer and Westpac-Sydney as drawee, and with Westpac-New York as the reimbursement Bank had been in place since 1960s and there was no reason for the Bank to suspect that this particular demand draft would not be honored by WestpacSydney. From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFT message is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message as an MT799 format. However, a closer look at the Bank's Exhs. "6" and "7" would show that despite what appears to be an asterick written over the figure before "99", the figure can still be distinctly seen as a number "1" and not number "7",

It is our view and we hold that there is no reversible error in the decision of the appellate court. Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise only questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court and they carry even more weight when the Court of Appeals affirms the factual findings of the trial court.10 The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit account with Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes, representing PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be effected through Westpac-New York where the respondent bank has a dollar account to Westpac-Sydney where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee, the 20th Asian Racing Conference Secretariat. PRCI and its Vice-President for finance, petitioner Gregorio H. Reyes, through their said representative, agreed to that arrangement or procedure. In other words, the petitioners are estopped from denying the said arrangement or procedure. Similar arrangements have been a long standing practice in banking to facilitate international commercial transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, Westpac-Sydney, stated that it may claim reimbursement from its New York branch, Westpac-New York, where respondent bank has a deposit dollar account. The facts as found by the courts a quo show that respondent bank did not cause an erroneous transmittal of its SWIFT cable message to WestpacSydney. It was the erroneous decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange demand draft. An employee of WestpacSydney in Sydney, Australia mistakenly read the printed figures in the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result, Westpac-Sydney construed the said cable message as a format for a letter of credit, and not for a demand draft. The appellate court correct found that "the figure before '99' can still be distinctly seen as a number '1' and not number '7'." Indeed, the line of a "7" is in a slanting position while the line of a "1" is in a horizontal position. Thus, the number "1" in "MT199" cannot be construed as "7".11 The evidence also shows that the respondent bank exercised that degree of diligence expected of an ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the reimbursement claim of Westpac-Sydney and to debit the dollar account12 of respondent bank with the former. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar account for the purpose of reimbursing Westpac-Sydney.13 Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the demand draft was not honored.14 With these established facts, we now determine the degree of diligence that banks are required to exert in their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship

with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. Considering the foregoing, the respondent bank was not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of the subject foreign exchange demand draft. The case at bar does not involve the handling of petitioners' deposit, if any, with the respondent bank. Instead, the relationship involved was that of a buyer and seller, that is, between the respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreign exchange demand draft was intended for the payment of the registration fees of the petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney. The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the subject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee of the latter could not have been foreseen by the respondent bank. Being unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has no deposit account with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar (AU $1610.00) indicated in the foreign exchange demand draft. Thus, the respondent bank had the impression that Westpac-New York had not yet made available the amount for reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and to transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand draft. In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand draft is not attributable to any fault of the respondent bank, whereas the petitioners appeared to be under estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the Negotiable Instruments Law to the case at bar. In any event, it was established that the respondent bank acted in good faith and that it did not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the Court of Appeals did not commit any reversable error in its challenged decision. WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is AFFIRMED. Costs against the petitioners. SO ORDERED.1wphi1.nt Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

G.R. No. 129995

October 19, 2001

THE PROVINCE OF BATAAN, petitioner-appellant, vs. HON. PEDRO VILLAFUERTE, JR., as Presiding Judge of the Regional Trial Court of Bataan (Branch 4), and THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, respondents-appellees. BUENA, J.: Sought to be reversed in the instant Petition for Review on Certiorari is the Decision1 of the Court of Appeals, dated 19 December 1996, in C.A. G.R. SP. No. 33344, upholding the twin orders dated 28 July 1993 and 11 November 1993 of the Regional Trial Court (RTC) of Bataan, Branch 4, in Civil Case No. 210-ML, for annulment of sale. In its order dated 28 July 1993,2 the lower court directed that herein petitioner Province of Bataan remit to said court whatever lease rentals petitioner may receive from lessees 7-R Port Services and Marina Port Services, and that such lease rentals be placed under a special time deposit with the Land Bank of the Philippines, Balanga Branch, for the account of the RTC-Balanga, Branch 4, in escrow, for the person or persons, natural or juridical, who may be adjudged lawfully entitled thereto. The order dated 11 November 1993,3 denied herein petitioners motion for reconsideration of the 28 July, 1993 order. Involved in the present controversy is an expanse of real property (hereinafter referred to as the BASECO property) situated at Mariveles, Bataan and formerly registered and titled in the name of either the Bataan Shipyard and Engineering Corporation (BASECO), the Philippine Dockyard Corporation or the Baseco Drydock and Construction Co., Inc.. Pursuant to Presidential Decree No. 464, otherwise known as the Real Property Tax Code of 1974, the Provincial Treasurer of Bataan advertised for auction sale the BASECO property due to real estate tax delinquency amounting to P7,914,281.72, inclusive of penalties.4 At the auction sale held on 12 February 1988, no bidder vied for said property as a result of which, the Provincial Treasurer of Bataan adjudged the property to, and acquired the same for, and in the name of herein petitioner Province of Bataan. Upon the expiration of the one-year redemption period, and without the owner exercising its right to redeem the subject property, the Provincial Government of Bataan consolidated its title thereon; the corresponding certificates of title were then issued in the name of herein petitioner Province of Bataan. Eventually, petitioner, thru then Provincial Governor Enrique T. Garcia, entered into a ten-year contract of lease with 7-R Port Services, Inc., whereby portions of the BASECO property including facilities and improvements thereon, were leased to the latter for a minimum escalating annual rental of Eighteen Million Pesos (P18 million). On 10 May 1993, petitioner forged another contract of lease with Marina Port Services, over a ten-hectare portion of the BASECO property. On 11 May 1993, The Presidential Commission on Good Government (PCGG), for itself and on behalf of the Republic of the Philippines and the BASECO, the Philippine Dockyard Corporation and the Baseco Drydock and Construction Co. Inc., filed with the RTC-Bataan a complaint for annulment of sale,5 principally assailing the validity of the tax delinquency sale

of the BASECO property in favor of petitioner Province of Bataan. Among others, the complaint alleged that the auction sale held on 12 February 1988, is void for having been conducted:6 "a) In defiance of an injunctive order issued by the PCGG in the exercise of its powers under Executive Order No. 1, Series of 1986; "b) in contravention of the Real Property Tax Code of 1974; "c) while the issue of ownership of the Baseco property and of whether the same partakes of the nature of illgotten wealth is pending litigation in Civil Case No. 0010 before the Sandiganbayan; and "d) despite the inscription of the sequestration order at the back of each title of the BASECO property." In its prayer, the complaint asked for the following reliefs: "1) The tax delinquency sale held on February 12, 1988 be declared null and void; and the defendant Province of Bataan be ordered to reconvey all the properties thus sold to its rightful owners, the Republic of the Philippines and/or the other plaintiffs herein; "2) The defendants be ordered to render an accounting to, and pay plaintiffs all earnings, fruits and income which they have received or could have received from the time they claimed ownership and took possession and control of all the auctioned properties; and to account and pay for all the losses, deterioration and destruction thereof; "3) The defendants be ordered, jointly and severally to pay plaintiffs for all damages suffered by it/them by reason of the unlawful actuations of the defendants, in the sum herein claimed and proven at the trial of this case, including attorneys fees and costs of suit; "4) The defendant 7-R Port Services, Inc. be ordered to immediately cease and desist from paying any lease rentals to the Province of Bataan, and instead to pay the same directly to the plaintiffs; "5) The Register of Deeds of Bataan be ordered to cancel the Torrens titles it had issued in favor of the Province of Bataan, and issue a new Torrens titles (sic) in favor of plaintiffs in lieu of the cancelled ones". Herein respondent PCGG, upon learning of the lease contracts entered into by and between petitioner and Marina Port Services, filed with the RTC an urgent motion for the issuance of a writ of preliminary injunction to enjoin herein petitioner "from entering into a lease contract with Marina Port Services, Inc. (Marina), or any other entity, and/or from implementing/enforcing such lease contract, if one has already been executed, and to maintain the status quo until further orders from the Court." On 06 July 1993, the lower court denied the motion ratiocinating that the lease contract with Marina was already afait accompli when the motion was filed, and that Marina was not a

party to the suit for not having been impleaded as partydefendant. On 30 June 1993, the PCGG filed with the lower court an "Urgent Motion to Deposit Lease Rentals," alleging inter alia that the rentals amounting to "Hundreds of Millions of Pesos" are "in danger of being unlawfully spent, squandered and dissipated to the great and irreparable damage of plaintiffs who are the rightful owners of the property leased." On 28 July 1993, the lower court granted the PCGGs urgent motion and issued its assailed order the dispositive portion of which reads: "ACCORDINGLY, the defendant Province of Bataan is hereby ordered to remit to this Court the lease rentals it may receive from the defendant 7-R Port Services, Inc. and the Marina Port Services, Inc. to commence from its receipt of this Order and for the Clerk of Court of this Branch to deposit said amount under special time deposit with the Land Bank of the Philippines, Balanga Branch, in Balanga, Bataan in the name and/or account of this Court to be held in ESCROW for the person or persons, natural or juridical, who may be finally adjudged lawfully entitled thereto, and subject to further orders from this Court."7 Petitioner moved to reconsider the aforementioned order, which motion the lower court denied via its assailed order dated 11 November 1993.8 Aggrieved by the lower courts twin orders, petitioner filed before the Court of Appeals a petition for certiorari with prayer for issuance of a temporary restraining order and writ of preliminary injunction.9 On 01 December 1995, the Bataan Shipyard and Engineering Corporation, the Philippine Dockyard Corporation and the Baseco Drydock and Construction Co., Inc., filed a motion for leave to intervene before the Court of Appeals. In a Resolution dated 26 March 1996, the appellate court granted the motion. On 16 April 1996, the intervenors-respondents filed their Answer-in-Intervention praying for the dismissal of the petition before the Court of Appeals and the dissolution of the preliminary injunction issued in favor of petitioners.10 In its Decision dated 19 December 1996, the Court of Appeals dismissed the petition to which a motion for reconsideration was filed by petitioner. In a Resolution dated 21 July 1997, respondent court likewise denied the motion for reconsideration, hence, the instant appeal where petitioner Province of Bataan imputes to the Court of Appeals a lone assignment of error, to wit: "The Court of Appeals manifestly erred in refusing to declare and/or hold that the respondent judge acted without jurisdiction or with grave abuse of discretion in ordering the deposit in escrow of the rental payments pertaining to the petitioner province." In simpler terms, the sole issue for resolution revolves around the propriety of the escrow order issued by the lower court in the civil suit for annulment of sale. The instant petition is devoid of merit.

In the main, petitioner insists that the issuance of the escrow order by the trial court "was patently irregular, if not downright anomalous", reasoning that "nowhere in the Revised Rules of Court is the trial court, or any court for that matter, authorized to issue such escrow order, whether as a provisional or permanent remedy." According to petitioner, "the escrow orders in question are null and void ab initio for having been issued absent any legal basis" and are "merely calculated to prejudice the petitioner province without any practical or worthwhile, much less legal objective." We do not agree. An escrow11 fills a definite niche in the body of the law; it has a distinct legal character.12 The usual definition is that an escrow is a written instrument which by its terms imports a legal obligation and which is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept by the depositary until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, promisee, or obligee.13 While originally, the doctrine of escrow applied only to deeds by way of grant,14 or as otherwise stated, instruments for the conveyance of land,15 under modern theories of law, the term escrow is not limited in its application to deeds, but is applied to the deposit of any written instrument with a third person.16 Particular instruments which have been held to be the subject of an escrow include bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land or for the purchase of personal property, corporate stocks and stock subscriptions, promissory notes or other commercial paper, insurance applications and policies, contracts for the settlement of will-contest cases, indentures of apprenticeship, receipts assigning concessions and discontinuances and releases of causes of action.17 Moreover, it is no longer open to question that money may be delivered in escrow.18 In our jurisdiction, an escrow order issued by a court of law may find ample basis and support in the courts intrinsic power to issue orders and other ancillary writs and processes incidental or reasonably necessary to the exercise of its main jurisdiction. Evidently, judicial power connotes certain incidental and inherent attributes reasonably necessary for an effective administration of justice.19 In a manner of speaking, courts have not only the power to maintain their life, but they have also the power to make that existence effective for the purpose for which the judiciary was created. They can, by appropriate means, do all things necessary to preserve and maintain every quality needful to make the judiciary an effective institution of Government. Courts have therefore inherent power to preserve their integrity, maintain their dignity and to insure effectiveness in the administration of justice.20 To lend flesh and blood to this legal aphorism, Rule 135 of the Rules of Court explicitly provides: "Section 5. Inherent powers of courts- Every court shall have power: "X X X (g) To amend and control its process and orders so as to make them conformable to law and justice. "Section 6. Means to carry jurisdiction into effect - When by law jurisdiction is conferred on a court or judicial

officer, all auxiliary writs, processes and other means necessary to carry it into effect may be employed by such court or officer, and if the procedure to be followed in the exercise of such jurisdiction is not specifically pointed out by law or by these rules, any suitable process or mode of proceeding may be adopted which appears conformable to the spirit of said law or rules." (Emphasis ours) It is beyond dispute that the lower court exercised jurisdiction over the main action docketed as Civil Case No. 210-ML, which involved the annulment of sale and reconveyance of the subject properties. Under this circumstance, we are of the firm view that the trial court, in issuing the assailed escrow orders, acted well within its province and sphere of power inasmuch as the subject orders were adopted in accordance with the Rules and jurisprudence and were merely incidental to the courts exercise of jurisdiction over the main case, thus: " X X X Jurisdiction attaching, the courts powers as a necessary incident to their general jurisdiction, to make such orders in relation to the cases pending before them are as necessary to the progress of the cases and the dispatch of business follow. Deming v. Foster, 42 N.H. 165, 178 cited in Burleigh v. Wong Sung De Leon 139 A. 184,83 N.H. 115. "X X X XXX XXX

court is generally to preserve the subject matter of the litigation to maintain the status, or issue some extraordinary writs provided by law, such as attachments, etc. None of these powers, however, are exercised on the theory that the court should, in advance of the final adjudication determine the rights of the parties in any summary way and put either of them in the enjoyment thereof; but such actions taken merely, as means for securing an effective adjudication and enforcement of rights of the parties after such adjudication. Colby c. Osgood Tex. Civ. App., 230 S.W. 459;)"21 (emphasis ours) On this score, the incisive disquisition of the Court of Appeals is worthy of mention, to wit: " X X X Given the jurisdiction of the trial court to pass upon the raised question of ownership and possession of the disputed property, there then can hardly be any doubt as to the competence of the same court, as an adjunct of its main jurisdiction, to require the deposit in escrow of the rentals thereof pending final resolution of such question. To paraphrase the teaching in Manila Herald Publishing Co., Inc. vs. Ramos (G.R. No. L-4268, January 18, 1951, cited in Francisco, Revised Rules of Court, Vol. 1, 2nd ed., p. 133), jurisdiction over an action carries with it jurisdiction over an interlocutory matter incidental to the cause and deemed essential to preserve the subject matter of the suit or to protect the parties interest. X X X " X X X the impugned orders appear to us as a fair response to the exigencies and equities of the situation. Parenthetically, it is not disputed that even before the institution of the main case below, the Province of Bataan has been utilizing the rental payments on the Baseco Property to meet its financial requirements. To us, this circumstance adds a more compelling dimension for the issuance of the assailed orders. X X X" Applying the foregoing principles and considering the peculiarities of the instant case, the lower court, in the course of adjudicating and resolving the issues presented in the main suit, is clearly empowered to control the proceedings therein through the adoption, formulation and issuance of orders and other ancillary writs, including the authority to place the properties in custodia legis, for the purpose of effectuating its judgment or decree and protecting further the interests of the rightful claimants of the subject property. To trace its source, the courts authority proceeds from its jurisdiction and power to decide, adjudicate and resolve the issues raised in the principal suit. Stated differently, the deposit of the rentals in escrow with the bank, in the name of the lower court, "is only an incident in the main proceeding."22 To be sure, placing property in litigation under judicial possession, whether in the hands of a receiver, and administrator, or as in this case, in a government bank,23 is an ancient and accepted procedure.24 Consequently, we find no cogency to disturb the questioned orders of the lower court and in effect uphold the propriety of the subject escrow orders. (emphasis ours) IN VIEW WHEREOF, the instant petition is hereby DENIED for lack of merit. ACCORDINGLY, the assailed decision of the Court of Appeals is hereby AFFIRMED.

"X X X A court is vested, not only with the powers expressly granted by the statute, but also with all such powers as are incidentally necessary to the effective exercise of the powers expressly conferred (In re McLures Estate, 68 Mont. 556, 220 P. 527) and to render its orders, made under such express powers effective. Brown v. Clark, 102 Tex. 323, 116 S.W. 360, 24 L.R.A. (N.S.) 670 cited in State v. District Court, 272 P. 525. "X X X XXX XXX

"In the absence of prohibitive legislation, courts have inherent power to provide themselves with appropriate procedures required for the performance of their tasks. Ex parte Peterson, 253 U.S. 300, 312, 313, 40 S. Ct. 543, 64 L. Ed. 919; Funk v. U.S., 290 U.S. 371,381384, 54 A. Ct. 212, 78 L.Ed. 369, 93 A.L.R. 1136 cited in Ex parte U.S. C.C.A. Wis., 101 F 2d 870. "X X X XXX XXX

"A court has inherent power to make such interlocutory orders as may be necessary to protect its jurisdiction, and to make certain that its eventual decree may not be ineffective. (Boynton v. Moffat Tunnel Improvement Dist. C.C.A. Colo, 57 F, 2d 772. "X X X XXX XXX

"In the ordinary case the courts can proceed to the enforcement of the plaintiffs rights only after a trial had in the manner prescribed by the laws of the land, which involves due notice, the right of the trial by jury, etc.Preliminary to such an adjucation, the power of the

III. Necessary Deposit G.R. No. 126780 February 17, 2005

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, vs. THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents. DECISION TINGA, J.: The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers. Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October 1995 of the Court of Appeals which affirmed the Decision2 dated 16 December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty Corporation. The factual backdrop of the case follow. Private respondent McLoughlin, an Australian businessmanphilanthropist, used to stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him around, introducing him to important people, accompanying him in visiting impoverished street children and assisting him in buying gifts for the children and in distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he started staying during his trips to the Philippines from December 1984 to September 1987.3 On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its safety deposit boxes. The safety deposit box could only be opened through the use of two keys, one of which is given to the registered guest, and the other remaining in the possession of the management of the hotel. When a registered guest wished to open his safety deposit box, he alone could personally request the management who then would assign one of its employees to accompany the guest and assist him in opening the safety deposit box with the two keys.4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety deposit box.5 On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit box with his key and with the key of the management and took therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports and his credit cards.6 McLoughlin left the other items in the box as he did not check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US Dollars (US$3,000.00) were enclosed therein.7 Since he had no idea whether somebody else had tampered with his safety deposit box, he thought that it was just a result of bad accounting since he did not spend anything from that envelope.8 After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored in the safety deposit box upon his return to Tropicana was likewise missing, except for a diamond bracelet.9 When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or jewelry which he had lost were found and returned to her or to the management. However, Lainez told him that no one in the hotel found such things and none were turned over to the management. He again registered at Tropicana and rented a safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in the envelope previously containing Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing.10 When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan opened the safety deposit box with the key assigned to him.11 McLoughlin went up to his room where Tan was staying and confronted her. Tan admitted that she had stolen McLoughlin's key and was able to open the safety deposit box with the assistance of Lopez, Payam and Lainez.12 Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin while the latter was asleep.13 McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a

promissory note dated 21 April 1988. The promissory note reads as follows: I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988.14 Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must assume responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying on the conditions for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit Box,"15specifically paragraphs (2) and (4) thereof, to wit: 2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not limited to the presentation or use thereof by any other person should the key be lost; ... 4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon giving up the use of the box.16 On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the abovementioned stipulations. They opined that the stipulations are void for being violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent to President Corazon Aquino.17 The Office of the President referred the letter to the Department of Justice (DOJ) which forwarded the same to the Western Police District (WPD).18 After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation. But McLoughlin went back to Australia as he had an urgent business matter to attend to. For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines to follow up on his letter to the President but he failed to obtain any concrete assistance.19 McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his claims against petitioners, the WPD conducted an investigation which resulted in the preparation of an affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit became the basis of preliminary investigation. However, McLoughlin left again for Australia without receiving the notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to those having responsibility to pay the damage. Then he left again for Australia.

Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings were held between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an urgent business matter. Tan and Lopez, however, were not served with summons, and trial proceeded with only Lainez, Payam and YHT Realty Corporation as defendants. After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint20 dated 10 June 1991 which included another incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April 1988.21 The trial court admitted the Amended/Supplemental Complaint. During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills, airfare and other transportation expenses, long distance calls to Australia, Meralco power expenses, and expenses for food and maintenance, among others.22 After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which reads: WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and against the defendants, to wit: 1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12% interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC); 2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and consequential damages arising from the loss of his Australian and American dollars and jewelries complained against and in prosecuting his claim and rights administratively and judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC"); 3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral damages (Item X, Exh. "CC"); 4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary damages (Item XI, Exh. "CC"); 5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00 (Item XII, Exh. "CC");

6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorney's fees, and a fee of P3,000.00 for every appearance; and 7. Plus costs of suit. SO ORDERED.23 The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of money he lost were sufficiently shown by his direct and straightforward manner of testifying in court and found him to be credible and worthy of belief as it was established that McLoughlin's money, kept in Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent. The taking was effected through the use of the master key which was in the possession of the management. Payam and Lainez allowed Tan to use the master key without authority from McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have gone through the trouble and personal inconvenience of seeking aid and assistance from the Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire to recover his losses from the hotel management and Tan.24 As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana previous to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21 November 1990 because he was not sure how they were lost and who the responsible persons were. But considering the admission of the defendants in their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial court opined that it was logical and reasonable to presume that his personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety deposit box without McLoughlin's consent through the cooperation of Payam and Lainez.25 The trial court also found that defendants acted with gross negligence in the performance and exercise of their duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by McLoughlin.26 Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code and against public policy.27 Thus, there being fraud or wanton conduct on the part of defendants, they should be responsible for all damages which may be attributed to the nonperformance of their contractual obligations.28 The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of damages awarded. The decretal text of the appellate court's decision reads: THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows: The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts: 1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;

2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a total of eleven (11) trips; 3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel; 4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower; 5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses; 7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance; 8) P50,000.00 for moral damages; 9) P10,000.00 as exemplary damages; and 10) P200,000 representing attorney's fees. With costs. SO ORDERED.29 Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari. Petitioners submit for resolution by this Court the following issues: (a) whether the appellate court's conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is supported by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners in the performance of their duties as innkeepers is supported by the evidence on record; (c) whether the "Undertaking For The Use of Safety Deposit Box" admittedly executed by private respondent is null and void; and (d) whether the damages awarded to private respondent, as well as the amounts thereof, are proper under the circumstances.30 The petition is devoid of merit. It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral factual question addressed to this Court is beyond the bounds of this mode of review. Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the dollars and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the basis of the trial court and the appellate court being the sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners dispute the finding of gross negligence on their part as not supported by the evidence on record. We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as affirmed by the appellate court that the fact of

loss was established by the credible testimony in open court by McLoughlin. Such findings are factual and therefore beyond the ambit of the present petition.1awphi1.nt The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected the veracity of the facts testified to by him. On this score, we give full credence to the appreciation of testimonial evidence by the trial court especially if what is at issue is the credibility of the witness. The oft-repeated principle is that where the credibility of a witness is an issue, the established rule is that great respect is accorded to the evaluation of the credibility of witnesses by the trial court.31 The trial court is in the best position to assess the credibility of witnesses and their testimonies because of its unique opportunity to observe the witnesses firsthand and note their demeanor, conduct and attitude under grilling examination.32 We are also not impressed by petitioners' argument that the finding of gross negligence by the lower court as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other remains in the possession of the management. If the guest desires to open his safety deposit box, he must request the management for the other key to open the same. In other words, the guest alone cannot open the safety deposit box without the assistance of the management or its employees. With more reason that access to the safety deposit box should be denied if the one requesting for the opening of the safety deposit box is a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to conclude that the management had at least a hand in the consummation of the taking, unless the reason for the loss is force majeure. Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master key of the management when the loss took place. In fact, they even admitted that they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box.33 This only proves that Tropicana had prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its employees. The management should have guarded against the occurrence of this incident considering that Payam admitted in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep.34 In light of the circumstances surrounding this case, it is undeniable that without the acquiescence of the employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlin's money could and should have been avoided. The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he made the management believe that Tan was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and

intimacy are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they should have confronted him as to his relationship with Tan considering that the latter had been observed opening McLoughlin's safety deposit box a number of times at the early hours of the morning. Tan's acts should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law. Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180, paragraph (4) of the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such employer.35 Thus, given the fact that the loss of McLoughlin's money was consummated through the negligence of Tropicana's employees in allowing Tan to open the safety deposit box without the guest's consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193.36 The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the appellate court found the same to be null and void. We find no reason to reverse their common conclusion. Article 2003 is controlling, thus: Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 200137 is suppressed or diminished shall be void. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn.39 With greater reason should the liability of the hotelkeeper be enforced when the missing items

are taken without the guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil Code for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for any cause whatsoever.40 Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure.41 It is the loss through force majeurethat may spare the hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber was done with the use of arms or through an irresistible force to qualify the same as force majeure.42 Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would lead us to reject petitioners' contention. The justification they raise would render nugatory the public interest sought to be protected by the provision. What if the negligence of the employer or its employees facilitated the consummation of a crime committed by the registered guest's relatives or visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss.44 In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself but also by the management since two keys are necessary to open the safety deposit box. Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow any person, under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that will attach thereafter in case such person turns out to be a complete stranger. This will allow the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the guest's relatives and visitors. Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial court and the appellate court upheld the grant of the claims of the latter on the basis of tort.45 There is nothing anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that breaks the contract may also be tort.46 As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the appellate court for the same

were based on facts and law. It is within the province of lower courts to settle factual issues such as the proper amount of damages awarded and such finding is binding upon this Court especially if sufficiently proven by evidence and not unconscionable or excessive. Thus, the appellate court correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at the time of payment,47 being the amounts duly proven by evidence.48 The alleged loss that took place prior to 16 April 1988 was not considered since the amounts alleged to have been taken were not sufficiently established by evidence. The appellate court also correctly awarded the sum of P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11) trips;49one-half of P336,207.05 or P168,103.52 representing payment to Tropicana;50 one-half of P152,683.57 orP76,341.785 representing payment to Echelon Tower;51 onehalf of P179,863.20 or P89,931.60 for the taxi or transportation expenses from McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;52 one-half of P7,801.94 or P3,900.97 representing Meralco power expenses;53 one-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance.54 The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to determine the amount of moral damages, the appellate court may modify or change the amount awarded when it is palpably and scandalously excessive.l^vvphi1.net Moral damages are not intended to enrich a complainant at the expense of a defendant.l^vvphi1.net They are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone, by reason of defendants' culpable action.55 The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorney's fees are likewise sustained. WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the following amounts: (1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment; (2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11) trips; (3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment Hotel; (4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower; (5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; (6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses; (7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance; (8) P50,000.00 for moral damages; (9) P10,000.00 as exemplary damages; and (10) P200,000 representing attorney's fees. With costs. SO ORDERED.

G.R. No. 179419

January 12, 2011

DURBAN APARTMENTS CORPORATION, doing business under the name and style of City Garden Hotel,Petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION, Respondent. DECISION NACHURA, J.: For review is the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 86869, which affirmed the decision 2 of the Regional Trial Court (RTC), Branch 66, Makati City, in Civil Case No. 03-857, holding petitioner Durban Apartments Corporation solely liable to respondent Pioneer Insurance and Surety Corporation for the loss of Jeffrey Sees (Sees) vehicle. The facts, as found by the CA, are simple. On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x x, by right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of Damages against [petitioner] Durban Apartments Corporation, doing business under the name and style of City Garden Hotel, and [defendant before the RTC] Vicente Justimbaste x x x. [Respondent averred] that: it is the insurer for loss and damage of Jeffrey S. Sees [the insureds] 2001 Suzuki Grand Vitara x x x with Plate No. XBH-510 under Policy No. MC-CV-HO-01-0003846-00-D in the amount of P1,175,000.00; on April 30, 2002, See arrived and checked in at the City Garden Hotel in Makati corner Kalayaan Avenues, Makati City before midnight, and its parking attendant, defendant x x x Justimbaste got the key to said Vitara from See to park it[. O]n May 1, 2002, at about 1:00 oclock in the morning, See was awakened in his room by [a] telephone call from the Hotel Chief Security Officer who informed him that his Vitara was carnapped while it was parked unattended at the parking area of Equitable PCI Bank along Makati Avenue between the hours of 12:00 [a.m.] and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer, thereafter reported the incident to the Operations Division of the Makati City Police Anti-Carnapping Unit, and a flash alarm was issued; the Makati City Police Anti-Carnapping Unit investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x and defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to the police investigator, and filed a Complaint Sheet with the PNP Traffic Management Group in Camp Crame, Quezon City; the Vitara has not yet been recovered since July 23, 2002 as evidenced by a Certification of Non- Recovery issued by the PNP TMG; it paid the P1,163,250.00 money claim of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss of the Vitara; the Vitara was lost due to the negligence of [petitioner] Durban Apartments and [defendant] Justimbaste because it was discovered during the investigation that this was the second time that a similar incident of carnapping happened in the valet parking service of [petitioner] Durban Apartments and no necessary precautions were taken to prevent its repetition; [petitioner] Durban Apartments was wanting in due diligence in the selection and supervision of its employees particularly defendant x x x Justimbaste; and defendant x x x Justimbaste and [petitioner] Durban Apartments failed and refused to pay its valid, just, and lawful claim despite written demands. Upon service of Summons, [petitioner] Durban Apartments and [defendant] Justimbaste filed their Answer with Compulsory

Counterclaim alleging that: See did not check in at its hotel, on the contrary, he was a guest of a certain Ching Montero x x x; defendant x x x Justimbaste did not get the ignition key of Sees Vitara, on the contrary, it was See who requested a parking attendant to park the Vitara at any available parking space, and it was parked at the Equitable Bank parking area, which was within Sees view, while he and Montero were waiting in front of the hotel; they made a written denial of the demand of [respondent] Pioneer Insurance for want of legal basis; valet parking services are provided by the hotel for the convenience of its customers looking for a parking space near the hotel premises; it is a special privilege that it gave to Montero and See; it does not include responsibility for any losses or damages to motor vehicles and its accessories in the parking area; and the same holds true even if it was See himself who parked his Vitara within the premises of the hotel as evidenced by the valet parking customers claim stub issued to him; the carnapper was able to open the Vitara without using the key given earlier to the parking attendant and subsequently turned over to See after the Vitara was stolen; defendant x x x Justimbaste saw the Vitara speeding away from the place where it was parked; he tried to run after it, and blocked its possible path but to no avail; and See was duly and immediately informed of the carnapping of his Vitara; the matter was reported to the nearest police precinct; and defendant x x x Justimbaste, and Horlador submitted themselves to police investigation. During the pre-trial conference on November 28, 2003, counsel for [respondent] Pioneer Insurance was present. Atty. Monina Lee x x x, counsel of record of [petitioner] Durban Apartments and Justimbaste was absent, instead, a certain Atty. Nestor Mejia appeared for [petitioner] Durban Apartments and Justimbaste, but did not file their pre-trial brief. On November 5, 2004, the lower court granted the motion of [respondent] Pioneer Insurance, despite the opposition of [petitioner] Durban Apartments and Justimbaste, and allowed [respondent] Pioneer Insurance to present its evidence ex parte before the Branch Clerk of Court. See testified that: on April 30, 2002, at about 11:30 in the evening, he drove his Vitara and stopped in front of City Garden Hotel in Makati Avenue, Makati City; a parking attendant, whom he had later known to be defendant x x x Justimbaste, approached and asked for his ignition key, told him that the latter would park the Vitara for him in front of the hotel, and issued him a valet parking customers claim stub; he and Montero, thereafter, checked in at the said hotel; on May 1, 2002, at around 1:00 in the morning, the Hotel Security Officer whom he later knew to be Horlador called his attention to the fact that his Vitara was carnapped while it was parked at the parking lot of Equitable PCI Bank which is in front of the hotel; his Vitara was insured with [respondent] Pioneer Insurance; he together with Horlador and defendant x x x Justimbaste went to Precinct 19 of the Makati City Police to report the carnapping incident, and a police officer came accompanied them to the Anti-Carnapping Unit of the said station for investigation, taking of their sworn statements, and flashing of a voice alarm; he likewise reported the said incident in PNP TMG in Camp Crame where another alarm was issued; he filed his claim with [respondent] Pioneer Insurance, and a representative of the latter, who is also an adjuster of Vesper Insurance Adjusters-Appraisers [Vesper], investigated the incident; and [respondent] Pioneer Insurance required him to sign a Release of Claim and Subrogation Receipt, and finally paid him the sum of P1,163,250.00 for his claim.

Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer Insurance tasked, among others, with the receipt of claims and documents from the insured, investigation of the said claim, inspection of damages, taking of pictures of insured unit, and monitoring of the processing of the claim until its payment; he monitored the processing of Sees claim when the latter reported the incident to [respondent] Pioneer Insurance; [respondent] Pioneer Insurance assigned the case to Vesper who verified Sees report, conducted an investigation, obtained the necessary documents for the processing of the claim, and tendered a settlement check to See; they evaluated the case upon receipt of the subrogation documents and the adjusters report, and eventually recommended for its settlement for the sum of P1,163,250.00 which was accepted by See; the matter was referred and forwarded to their counsel, R.B. Sarajan & Associates, who prepared and sent demand letters to [petitioner] Durban Apartments and [defendant] Justimbaste, who did not pay [respondent] Pioneer Insurance notwithstanding their receipt of the demand letters; and the services of R.B. Sarajan & Associates were engaged, for P100,000.00 as attorneys fees plus P3,000.00 per court appearance, to prosecute the claims of [respondent] Pioneer Insurance against [petitioner] Durban Apartments and Justimbaste before the lower court. Ferdinand Cacnio testified that: he is an adjuster of Vesper; [respondent] Pioneer Insurance assigned to Vesper the investigation of Sees case, and he was the one actually assigned to investigate it; he conducted his investigation of the matter by interviewing See, going to the City Garden Hotel, required subrogation documents from See, and verified the authenticity of the same; he learned that it is the standard procedure of the said hotel as regards its valet parking service to assist their guests as soon as they get to the lobby entrance, park the cars for their guests, and place the ignition keys in their safety key box; considering that the hotel has only twelve (12) available parking slots, it has an agreement with Equitable PCI Bank permitting the hotel to use the parking space of the bank at night; he also learned that a Hyundai Starex van was carnapped at the said place barely a month before the occurrence of this incident because Liberty Insurance assigned the said incident to Vespers, and Horlador and defendant x x x Justimbaste admitted the occurrence of the same in their sworn statements before the Anti-Carnapping Unit of the Makati City Police; upon verification with the PNP TMG [Unit] in Camp Crame, he learned that Sees Vitara has not yet been recovered; upon evaluation, Vesper recommended to [respondent] Pioneer Insurance to settle Sees claim for P1,045,750.00; See contested the recommendation of Vesper by reasoning out that the 10% depreciation should not be applied in this case considering the fact that the Vitara was used for barely eight (8) months prior to its loss; and [respondent] Pioneer Insurance acceded to Sees contention, tendered the sum of P1,163,250.00 as settlement, the former accepted it, and signed a release of claim and subrogation receipt. The lower court denied the Motion to Admit Pre-Trial Brief and Motion for Reconsideration field by [petitioner] Durban Apartments and Justimbaste in its Orders dated May 4, 2005 and October 20, 2005, respectively, for being devoid of merit.3 Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as follows: WHEREFORE, judgment is hereby rendered ordering [petitioner Durban Apartments Corporation] to pay [respondent Pioneer Insurance and Surety Corporation] the sum of P1,163,250.00 with legal interest thereon from July 22, 2003 until the obligation

is fully paid and attorneys fees and litigation expenses amounting toP120,000.00. SO ORDERED.4 On appeal, the appellate court affirmed the decision of the trial court, viz.: WHEREFORE, premises considered, the Decision dated January 27, 2006 of the RTC, Branch 66, Makati City in Civil Case No. 03857 is hereby AFFIRMED insofar as it holds [petitioner] Durban Apartments Corporation solely liable to [respondent] Pioneer Insurance and Surety Corporation for the loss of Jeffrey Sees Suzuki Grand Vitara. SO ORDERED.5 Hence, this recourse by petitioner. The issues for our resolution are: 1. Whether the lower courts erred in declaring petitioner as in default for failure to appear at the pretrial conference and to file a pre-trial brief; 2. Corollary thereto, whether the trial court correctly allowed respondent to present evidence ex-parte; 3. Whether petitioner is liable to respondent for attorneys fees in the amount of P120,000.00; and 4. Ultimately, whether petitioner is liable to respondent for the loss of Sees vehicle. The petition must fail. We are in complete accord with the common ruling of the lower courts that petitioner was in default for failure to appear at the pre-trial conference and to file a pre-trial brief, and thus, correctly allowed respondent to present evidence ex-parte. Likewise, the lower courts did not err in holding petitioner liable for the loss of Sees vehicle. Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of respect and are considered conclusive between the parties.6A review of such findings by this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises, or conjectures; (2) when a lower courts inference from its factual findings is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by evidence on record.7 None of the foregoing exceptions permitting a reversal of the assailed decision exists in this instance.

Petitioner urges us, however, that "strong [and] compelling reason[s]" such as the prevention of miscarriage of justice warrant a suspension of the rules and excuse its and its counsels non-appearance during the pre-trial conference and their failure to file a pre-trial brief. We are not persuaded. Rule 18 of the Rules of Court leaves no room for equivocation; appearance of parties and their counsel at the pre-trial conference, along with the filing of a corresponding pre-trial brief, is mandatory, nay, their duty. Thus, Section 4 and Section 6 thereof provide: SEC. 4. Appearance of parties.It shall be the duty of the parties and their counsel to appear at the pre-trial. The non-appearance of a party may be excused only if a valid cause is shown therefor or if a representative shall appear in his behalf fully authorized in writing to enter into an amicable settlement, to submit to alternative modes of dispute resolution, and to enter into stipulations or admissions of facts and documents. SEC. 6. Pre-trial brief.The parties shall file with the court and serve on the adverse party, in such manner as shall ensure their receipt thereof at least three (3) days before the date of the pretrial, their respective pre-trial briefs which shall contain, among others: xxxx Failure to file the pre-trial brief shall have the same effect as failure to appear at the pre-trial. Contrary to the foregoing rules, petitioner and its counsel of record were not present at the scheduled pre-trial conference. Worse, they did not file a pre-trial brief. Their non-appearance cannot be excused as Section 4, in relation to Section 6, allows only two exceptions: (1) a valid excuse; and (2) appearance of a representative on behalf of a party who is fully authorized in writing to enter into an amicable settlement, to submit to alternative modes of dispute resolution, and to enter into stipulations or admissions of facts and documents. Petitioner is adamant and harps on the fact that November 28, 2003 was merely the first scheduled date for the pre-trial conference, and a certain Atty. Mejia appeared on its behalf. However, its assertion is belied by its own admission that, on said date, this Atty. Mejia "did not have in his possession the Special Power of Attorney issued by petitioners Board of Directors." As pointed out by the CA, petitioner, through Atty. Lee, received the notice of pre-trial on October 27, 2003, thirty-two (32) days prior to the scheduled conference. In that span of time, Atty. Lee, who was charged with the duty of notifying petitioner of the scheduled pre-trial conference,8 petitioner, and Atty. Mejia should have discussed which lawyer would appear at the pretrial conference with petitioner, armed with the appropriate authority therefor. Sadly, petitioner failed to comply with not just one rule; it also did not proffer a reason why it likewise failed to file a pre-trial brief. In all, petitioner has not shown any persuasive reason why it should be exempt from abiding by the rules.

The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial brief and with only his bare allegation that he is counsel for petitioner, was correctly rejected by the trial court. Accordingly, the trial court, as affirmed by the appellate court, did not err in allowing respondent to present evidence ex-parte. Former Chief Justice Andres R. Narvasas words continue to resonate, thus: Everyone knows that a pre-trial in civil actions is mandatory, and has been so since January 1, 1964. Yet to this day its place in the scheme of things is not fully appreciated, and it receives but perfunctory treatment in many courts. Some courts consider it a mere technicality, serving no useful purpose save perhaps, occasionally to furnish ground for non-suiting the plaintiff, or declaring a defendant in default, or, wistfully, to bring about a compromise. The pre-trial device is not thus put to full use. Hence, it has failed in the main to accomplish the chief objective for it: the simplification, abbreviation and expedition of the trial, if not indeed its dispensation. This is a great pity, because the objective is attainable, and with not much difficulty, if the device were more intelligently and extensively handled. xxxx Consistently with the mandatory character of the pre-trial, the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court, and when a party "fails to appear at a pre-trial conference (he) may be non-suited or considered as in default." The obligation "to appear" denotes not simply the personal appearance, or the mere physical presentation by a party of ones self, but connotes as impo rtantly, preparedness to go into the different subject assigned by law to a pre-trial. And in those instances where a party may not himself be present at the pre-trial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the clients person, it is imperative for that representative of the lawyer to have "special authority" to make such substantive agreements as only the client otherwise has capacity to make. That "special authority" should ordinarily be in writing or at the very least be "duly established by evidence other than the self-serving assertion of counsel (or the proclaimed representative) himself." Without that special authority, the lawyer or representative cannot be deemed capacitated to appear in place of the party; hence, it will be considered that the latter has failed to put in an appearance at all, and he [must] therefore "be non-suited or considered as in default," notwithstanding his lawyers or delegates presence.9 We are not unmindful that defendants (petitioners) preclusion from presenting evidence during trial does not automatically result in a judgment in favor of plaintiff (respondent). The plaintiff must still substantiate the allegations in its complaint.10 Otherwise, it would be inutile to continue with the plaintiffs presentation of evidence each time the defendant is declared in default. In this case, respondent substantiated the allegations in its complaint, i.e., a contract of necessary deposit existed between the insured See and petitioner. On this score, we find no error in the following disquisition of the appellate court: [The] records also reveal that upon arrival at the City Garden Hotel, See gave notice to the doorman and parking attendant of the said hotel, x x x Justimbaste, about his Vitara when he

entrusted its ignition key to the latter. x x x Justimbaste issued a valet parking customer claim stub to See, parked the Vitara at the Equitable PCI Bank parking area, and placed the ignition key inside a safety key box while See proceeded to the hotel lobby to check in. The Equitable PCI Bank parking area became an annex of City Garden Hotel when the management of the said bank allowed the parking of the vehicles of hotel guests thereat in the evening after banking hours.11 Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by persons in hotels or inns: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary.1avvphi1 The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping with petitioner, through the latters employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected from Sees delivery, when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of Sees vehicle. Lastly, petitioner assails the lower courts award of attorneys fees to respondent in the amount of P120,000.00. Petitioner claims that the award is not substantiated by the evidence on record. We disagree. While it is a sound policy not to set a premium on the right to litigate,12 we find that respondent is entitled to reasonable attorneys fees. Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to protect its interest,13 or when the court deems it just and equitable.14 In this case, petitioner refused to answer for the loss of Sees vehicle, which was deposited with it for safekeeping. This refusal constrained respondent, the insurer of See, and subrogated to the latters right, to litigate and incur expenses. However, we reduce the award of P120,000.00 to P60,000.00 in view of the simplicity of the issues involved in this case. WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 86869 is AFFIRMED with the MODIFICATION that the award of attorneys fees is reduced to P60,000.00. Costs against petitioner. SO ORDERED.

IV. Sequestration or Judicial Deposit G.R. No. 143994 July 11, 2002

LOS BAOS RURAL BANK, INC., petitioner, vs. PACITA O. AFRICA, GLORIA AFRICA, ANTONIO AFRICA, ARISTEO AFRICA, SOCORRO AFRICA, CONSUELO AFRICA, AND LOURDES AFRICA, respondents. PANGANIBAN, J.: A writ of preliminary injunction is issued to preserve the status quo ante, upon an applicants showing of two important requisite conditions; namely, (1) the right to be protected exists prima facie, and (2) the acts sought to be enjoined are violative of that right. It must be proven that the violation sought to be prevented would cause an irreparable injustice. Statement of the Case Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the June 30, 2000 Decision1 of the Court of Appeals2 (CA) in CA-GR SP No. 53355. The decretal portion of the Decision reads as follows: "WHEREFORE, the petition is GRANTED. The Order dated April 19, 1999 insofar as it denied the petitioners application for the issuance of a writ of preliminary injunction, is hereby RECALLED and SET ASIDE. "Let a writ of preliminary injunction issue in this case to restrain the respondent bank from proceeding with the foreclosure and consolidation of the title over the subject property upon posting by petitioners of a bond in the amount of Php20,000.00."3 The Order of the Regional Trial Court (RTC) of Quezon City (Branch 220), which was reversed by the CA, reads as follows: "WHEREFORE, premises considered, the Order of the Court dated July 22, 1997 is hereby recalled and set aside. The application for issuance of writ of preliminary injunction is hereby DENIED. "Issues in this case having been joined, let this case be set for pre-trial on May 28, 1999 at 8:30 o clock in the morning. Send notice of pre-trial to the parties and counsels."4 The Facts The factual antecedents of the case are summarized by the Court of Appeals in this wise: "Petitioner Pacita Africa (Pacita for brevity) is the widow of Alberto Africa and the rest of her copetitioners are their children. "Records disclose that sometime in June 1989, the Quezon City Hall building where the Register of Deeds was then holding office was razed by fire, destroying some of its records/documents among which was the original Transfer Certificate of Title (TCT) No. 203492 covering a parcel of land situated in Diliman, Quezon City, and registered in the name of petitioner Pacita. The aforesaid property was part of the conjugal property of petitioner Pacita and her late husband Alberto Africa. "On request of Pacita, private respondent Macy Africa, the common-law wife of petitioner Antonio Africa, worked for the reconstitution of the aforesaid TCT No. 203492. The same was done and a new Transfer

Certificate of Title (TCT) No. RT-76140 (203492) PR36463 was issued in the name of Pacita Africa. While the reconstituted title was in her possession, Macy allegedly forged, or caused the forgery of, Pacitas signature on a Deed of Absolute Sale dated December 29, 1992, purporting to transfer ownership of the subject property to Macy. On the strength of the forged Deed of Absolute Sale, Macy was able to cause the issuance of TCT No. 81519 in her name, without the knowledge of any of herein petitioners. "Still as part of the scheme to defraud petitioners, Macy caused the preparation of a fake TCT No. 81519 in the name of Pacita, which the former showed to the latter to make Pacita believe that the said title was issued in her (Pacitas) name. "Sometime in March 1994, petitioners discovered private respondents fraudulent act. They (petitioners) likewise came to know that the subject property was mortgaged by Macy to the respondent bank. To protect their interests over the subject property, petitioners lodged an action in court against Macy and the respondent bank for Annulment of Title, Deed of Absolute Sale and Deed of Mortgage. The case was originally assigned to Branch 99 of the RTC of Quezon City and docketed as Civil Case No. Q-94-20898. "After the filing of the aforesaid case, the respondent bank in utter bad faith, foreclosed the subject property on June 11, 1996 without due notice to the petitioners, prompting the petitioners to amend [their] complaint, this time incorporating therein a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction, to stop the respondent bank from, among others, consolidating title to the subject property. "On July 2, 1997, RTC Branch 99 issued an Order granting petitioners application for a temporary restraining order. Meanwhile, the respondent bank filed its Manifestation, Opposition and Motion to Postpone dated July 11, 1997, praying, inter alia, for the denial of petitioners application for a writ of preliminary injunction, or in the alternative, for the cancellation of the hearing thereon. On July 18, 1997, the aforesaid court denied the respondent banks motion to postpone and proceeded with the hearing of petitioners application. Thereafter, petitioners application was considered submitted for resolution. "On July 22, 1997, the Court issued an Order granting petitioners application for a writ of preliminary injunction to which respondent bank filed a Motion for Reconsideration dated July 11, 1997 followed by a Motion for Inhibition on January 1, 1998 praying that Hon. Felix M. de Guzman, presiding judge of RTC, Branch 99, inhibit himself from further trying the case. This latter motion was granted, and the case was reraffled and assigned to Branch 220. "On April 19, 1999, RTC Branch 220, public respondent herein, issued the questioned Order."5

Ruling of the Court of Appeals The CA overturned the RTC Order dated April 19, 1999, and granted the issuance of a preliminary injunction to restrain petitioner from proceeding with the foreclosure and the consolidation of title over the subject property. The CA ruled that respondents had title to and possession of the property and were deprived thereof by petitioner. Thus, respondents had a clear and unmistakable right to protect their title and possession.6 Hence, this Petition.7 Issues In its Memorandum, petitioner raises the following issues for the Courts consideration: I "Whether the Court of Appeals acted with patent grave abuse of discretion in applying the ruling in Verzosa vs. Court of Appeals, (299 SCRA 100), to the instant case to justify its reversal of the 19 April 1999 Order of Branch 220 of the Regional Trial Court of Quezon City in Civil Case No. Q-94-20898[;] II "Whether the Court of Appeals acted with patent grave abuse of discretion when it rationalized its decision by citing factual premises therein that are not borne out by the records nor based on evidence and in fact contrary to reality[;] III "Whether the Court of Appeals acted with patent grave abuse of discretion when it ignored, disregarded and/or deviated from established jurisprudence governing the issuance of preliminary injunction demanded by private respondents against the petitioner bank[;] IV "Whether the Court [of] Appeals acted with patent grave abuse of discretion when it disregarded the pertinent provisions of Section 3, Rule 58, of the Revised Rules of Court providing for the grounds for issuance of preliminary injunction."8 In sum, the issues boil down to whether the appellate court erred in issuing a writ of preliminary injunction to stop petitioners consolidation of its title to the subject property. This Courts Ruling The Petition is not meritorious; it has not shown any reversible error in the CAs Decision. Main Issue: Propriety of Preliminary Injunction Petitioner argues that respondents do not have a right to the relief demanded, because they merely have possession of the property, as the legal title is in the name of Macy Africa.9 Furthermore, it claims that the consolidation of title in its name does not constitute an "invasion of a right that is material and substantial."10 On the other hand, respondents maintain that they would suffer great irreparable damage if the writ of preliminary injunction is not granted.11 They likewise contend that if petitioner is allowed

to consolidate its title to the subject property, they would lose their ancestral home, a loss that would result in unnecessary and protracted proceedings involving third parties.12 We agree with respondents. The grounds for the issuance of a writ of preliminary injunction are enumerated in Rule 58, Section 3 of the Revised Rules of Court, which reads as follows: "Sec. 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted when it is established; (a)That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually; (b)That the commission, continuance or nonperformance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c)That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual." Injunction is a preservative remedy aimed at no other purpose than to protect the complainants substantive rights and interests13 during the pendency of the principal action.14 A preliminary injunction, as the term itself suggests, is merely temporary.15 It is to be resorted to only when there is a pressing necessity to avoid injurious consequences that cannot be remedied under any standard of compensation.16 Moreover, injunction, like other equitable remedies, should be issued only at the instance of a suitor who has sufficient interest in or title to the right or the property sought to be protected.17 It is proper only when the plaintiff appears to be entitled to the relief demanded in the complaint.18 In particular, the existence of the right and the violation thereof must appear in the allegations of the complaint19 and must constitute at least a prima facie showing of a right to the final relief.20 Thus, there are two requisite conditions for the issuance of a preliminary injunction, namely, (1) the right to be protected exists prima facie, and (2) the acts sought to be enjoined are violative of that right.21 It must be proven that the violation sought to be prevented would cause an irreparable injustice. Further, while a clear showing of the right is necessary, its existence need not be conclusively established.22 In fact, the evidence required to justify the issuance of a writ of preliminary injunction in the hearing thereon need not be conclusive or complete. The evidence need only be a "sampling" intended merely to give the court an idea of the justification for the preliminary injunction, pending the decision of the case on the merits.23 Thus, to be entitled to the writ, respondents are only required to show that they have the ostensible right to the final relief prayed for in their Complaint.24

First Requisite: Existence of the Right In the case at bar, we find ample justification for the issuance of a writ of preliminary injunction.25 Evidently, the question on whether or not respondents possess the requisite right hinges on the prima facie existence of their legal title to the subject property.26 They have shown that they have that right, and that it is directly threatened by the act sought to be enjoined.27 First, as alleged in the Respondent Pacita Africa is the registered owner of the subject property. Her ownership is evidenced by the reconstituted Transfer Certificate of Title (TCT) No. RT-76140 (203492) PR-36463,29 issued by the Registry of Deeds of Quezon City. Second, the validity of the Deed of Sale30 dated December 29, 1992, is still in dispute because Respondent Pacita Africa claims that her signature was forged by the vendee, Macy Africa.31 Third, there is doubt as to the validity of the mortgage in favor of petitioner, because there exists on record two TCTs covering the mortgaged property: (1) TCT No. 8151932 registered in the name of Pacita Africa and (2) TCT No. 8151933 registered in the name of Macy Africa. If indeed the Deed of Sale is a forgery, no parcel of land was ever transferred to the purported buyer34 who, not being the owner, could not have validly mortgaged the property.35 Consequently, neither has petitioner -- the buyer and mortgagee of the same lot -- ever acquired any title thereto.36 Significantly, no evidence was presented by petitioner to controvert these allegations put forward by respondents. Clearly then, on the basis of the evidence presented, respondents possess the right to prevent petitioner from consolidating the title in its name. The first requisite -- the existence of a right to be protected -- is thus present.37 Second Requisite: Violation of Applicants Right As to the second requisite, what is sought to be enjoined by respondents is the consolidation of the title to the subject property in petitioners name. After having discovered that the property had been mortgaged to petitioner, respondents filed on June 12, 1994 an action for Annulment of Title, Deed of Sale, and Mortgage to protect their rights over the property.38 This notwithstanding, petitioner foreclosed it on June 11, 1996.39 To enjoin petitioner from consolidating the title in its name, respondents then filed an Amended Complaint,40 praying for a writ of preliminary injunction. Unless legally stopped, petitioner may consolidate title to the property in its name and enjoy the unbridled freedom to dispose of it to third persons, to the damage and prejudice of respondents.41 What respondents stand to lose is material and substantial.42 They would lose their ancestral home even without the benefit of a trial.43 Clearly, the act sought to be enjoined is violative of their proprietary right over the property.44 A writ of preliminary injunction is issued precisely to preserve threatened or continuous irremediable injury to some of the parties before their claims can be thoroughly studied and adjudicated.45 Denial of the application for the writ may make the Complaint of respondents moot and academic. Furthermore, it would render ineffectual a final judgment in their favor or, at the very least, compel them to litigate needlessly with third persons who may have acquired an interest in the property.46 Such a situation cannot be countenanced.47 Complaint,28

Lis Pendens Petitioner further contends that respondents are not entitled to the relief prayed for, because they caused a notice of lis pendens to be annotated at the back of TCT No. 81519, registered in the name of Macy P. Africa; thus, that notice provided ample protection of their rights and interests.48 We are not persuaded. A notice of lis pendens serves as an announcement to the whole world that a particular real property is in litigation and as a warning that those who acquire an interest in the property do so at their own risk -- they gamble on the result of the litigation over it.49 However, the cancellation of such notice may be ordered by the court that has jurisdiction over it at any given time.50 Its continuance or removal -- like the continuance or the removal of a preliminary attachment or injunction -- is not contingent on the existence of a final judgment on the action and ordinarily has no effect on the merits thereof.51 Thus, the notice of lis pendens does not suffice to protect herein respondents rights over the property.52 It does not provide complete and ample protection. Status Quo Ante Petitioner further claims that the RTC erred in enjoining the foreclosure sale of the subject property.53 It argues that the foreclosure may no longer be enjoined, because it has long been effected since 1996.54 We agree with petitioner. It is a well-entrenched rule that consummated acts can no longer be restrained by injunction55 whose sole objective is to preserve the status quo until the merits of the case are fully heard.56 Status quo is defined as the last actual peaceful uncontested situation that precedes a controversy, and its preservation is the office of an injunctive writ.57 In the instant case, the status quo was the situation of the parties at the time of the filing of the Amended Complaint58 with a prayer for a writ of preliminary injunction. It was that point at which petitioner had already foreclosed the subject property and, hence, could no longer be enjoined from going on with the foreclosure. However, the last actual uncontested status that preceded the controversy was when the property in dispute was still registered in the name of Macy Africa, petitioner not having consolidated in its name the title thereto.59 Thus, the issuance of the writ would no doubt preserve the status quo.60 We cannot rule on the allegation of petitioner that this case is a "scam perpetrated by private respondents" to defraud it.61 The truth or the falsity of that assertion cannot be ascertained by this Court at this time. Verily, we refrain from expressing any opinion on the merits of the case, pending a full consideration of the evidence that would be presented by the parties.62 WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals AFFIRMED. Costs against petitioner. SO ORDERED.