I.

Nature of Banks and

Diligence Required

Richelle Ann Zamora

 G.R. No. 88013 March 19, 1990
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
CRUZ, J.:
We are concerned in this case with the question of damages, specifically moral and exemplary
damages. The negligence of the private respondent has already been established. All we have
to ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the
exportation of food products. It buys these products from various local suppliers and then sells
them abroad, particularly in the United States, Canada and the Middle East. Most of its exports
are purchased by the petitioner on credit.
The petitioner was a depositor of the respondent bank and maintained a checking account in its
branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to
its account in the said bank the amount of P100,000.00, thus increasing its balance as of that
date to P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but
was suprised to learn later that they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company,
Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the
amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of
P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation
in the amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount
of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in
the amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of
P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of
demand to the petitioner, threatening prosecution if the dishonored check issued to it was not
made good. It also withheld delivery of the order made by the petitioner. Similar letters were
sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U.
Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded
that future payments be made by it in cash or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose checks were dishonored was also
deferred.
The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed
that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited
to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they
were re-deposited. 4
In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank
for its "gross and wanton negligence." This demand was not met. The petitioner then filed a
complaint in the then Court of First Instance of Rizal claiming from the private respondent moral
damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus
25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary
damages were not called for under the circumstances. However, observing that the plaintiff's
right had been violated, he ordered the defendant to pay nominal damages in the amount of
P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the
respondent court. 6
The respondent court found with the trial court that the private respondent was guilty of
negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It
said:
1
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150
SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's
deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said
amount in favor of plaintiff-appellant in less than a month. The dishonored checks were
eventually paid. These circumstances negate any imputation or insinuation of malicious,
fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share some of
the conclusions of the lower courts. It seems to us that the negligence of the private respondent
had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap
on the wrist. We feel it is not enough to say that the private respondent rectified its records and
credited the deposit in less than a month as if this were sufficient repentance. The error should
not have been committed in the first place. The respondent bank has not even explained why it
was committed at all. It is true that the dishonored checks were, as the Court of Appeals put it,
"eventually" paid. However, this took almost a month when, properly, the checks should have
been paid immediately upon presentment.
As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical
attitude toward the complaining depositor constituted the gross negligence, if not wanton bad
faith, that the respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent bank, the decision
practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not,
indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were
not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its
reputation was tarnished. Its standing was reduced in the business community. All this was due
to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be received
"(2) for injury to the plaintiff s business standing or commercial credit." There is no question that
the petitioner did sustain actual injury as a result of the dishonored checks and that the
existence of the loss having been established "absolute certainty as to its amount is not
required." 7 Such injury should bolster all the more the demand of the petitioner for moral
damages and justifies the examination by this Court of the validity and reasonableness of the
said claim.
We agree that moral damages are not awarded to penalize the defendant but to compensate
the plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking
such damages for the prejudice sustained by it as a result of the private respondent's fault. The
respondent court said that the claimed losses are purely speculative and are not supported by
substantial evidence, but if failed to consider that the amount of such losses need not be
established with exactitude precisely because of their nature. Moral damages are not
susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no
proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated." That is why the determination of the amount to be
awarded (except liquidated damages) is left to the sound discretion of the court, according to
"the circumstances of each case."
From every viewpoint except that of the petitioner's, its claim of moral damages in the amount
of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its
name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not
as a rule entitled to moral damages because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and
moral shock. The only exception to this rule is where the corporation has a good reputation that
is debased, resulting in its social humiliation. 9
We shall recognize that the petitioner did suffer injury because of the private respondent's
negligence that caused the dishonor of the checks issued by it. The immediate consequence was
that its prestige was impaired because of the bouncing checks and confidence in it as a reliable
debtor was diminished. The private respondent makes much of the one instance when the
petitioner was sued in a collection case, but that did not prove that it did not have a good
reputation that could not be marred, more so since that case was ultimately settled. 10 It does
not appear that, as the private respondent would portray it, the petitioner is an unsavory and
disreputable entity that has no good name to protect.
Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was
not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code,
"nominal damages are adjudicated in order that a right of the plaintiff, which has been violated
or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner
has indeed incurred loss through the fault of the private respondent, the proper remedy is the
award to it of moral damages, which we impose, in our discretion, in the same amount of
P20,000.00.
Now for the exemplary damages.
2
The pertinent provisions of the Civil Code are the following:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction
for the public good, in addition to the moral, temperate, liquidated or compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if
the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his
monthly bills and the payment of ordinary expenses. As for business entities like the petitioner,
the bank is a trusted and active associate that can help in the running of their affairs, not only
in the form of loans when needed but more often in the conduct of their day-to-day transactions
like the issuance or encashment of checks.
concept of the wanton manner contemplated in the Civil Code that calls for the imposition of
exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby
imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way
of example or correction for the public good," in the words of the law. It is expected that this
ruling will serve as a warning and deterrent against the repetition of the ineptness and
indefference that has been displayed here, lest the confidence of the public in the banking
system be further impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is
ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of
P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of
attorney's fees in the amount of P5,000.00, and costs.
SO ORDERED.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo, and as promptly as possible. This
has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as the dishonor of a check without good reason,
can cause the depositor not a little embarrassment if not also financial loss and perhaps even
civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is
obvious that the respondent bank was remiss in that duty and violated that relationship. What
is especially deplorable is that, having been informed of its error in not crediting the deposit in
question to the petitioner, the respondent bank did not immediately correct it but did so only
one week later or twenty-three days after the deposit was made. It bears repeating that the
record does not contain any satisfactory explanation of why the error was made in the first place
and why it was not corrected immediately after its discovery. Such ineptness comes under the

3
 G.R. No. 118492 August 15, 2001
GREGORIO H. REYES and CONSUELO PUYAT-REYES, 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.
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 Wespac-Sydney 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 Wespac-New 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 Puyat-Reyes 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,
4
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 Puyat-Reyes 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
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 Westpac-Sydney.
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", 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
5
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 re-examine the facts to cite
certain instances of negligence.
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 Westpac-
Sydney. 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 Westpac-
Sydney 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
6
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.
G.R. No. 173134, September 02, 2015
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. TARCILA FERNANDEZ, Respondent.;
DALMIRO SIAN, THIRD PARTY, Respondent.
DECISION
BRION, J.:
We resolve the Petition for Review on Certiorari filed by the petitioner Bank of the Philippine
Islands (BPI) under Rule 45 of the Rules of Court, assailing the Court of Appeals (CA) July 14, 2005
Decision1 and the June 14, 2006 Resolution2 in CA-G.R. CV No. 61764.
The Factual Antecedents
The present case arose from respondent Tarcila "Baby" Fernandez's (Tarcila) claim to her
proportionate share in the proceeds of four joint AND/OR accounts that the petitioner BPI
released to her estranged husband Manuel G. Fernandez (Manuel) without the presentation of
the requisite certificates of deposit. The facts leading to this dispute are outlined below.
In 1991, Tarcila together with her husband, Manuel and their children Monique Fernandez and
Marco Fernandez, opened the following AND/OR deposit accounts with the petitioner BPI, Shaw
Blvd. Branch:chanRoblesvirtualLawlibrary
1)
Peso Time Certificate of Deposit No. 2425545 issued on June 27, 1991 in the name(s) of Manuel
G. Fernandez Sr. or Baby Fernandez or Monique Fernandez in the amount of P1,684,661.40,
with a term of 90 days and a corresponding interest at 17.5% per annum;3
2)
Peso Time Certificate of Deposit No. 2425556 issued on July 1, 1991 in the name(s) of Manuel
G. Fernandez Sr. or Marco Fernandez or Tarcila Fernandez, in the amount of P1,534,335.10, with
a term of 92 days and interest at 17.5% per annum;4
3)
FCDU Time Certificate of Deposit No. 449059 issued on August 27, 1991 in the name(s) of
Manuel or Tarcila Fernandez in the amount of US$36,219.53, with a term of 30 days and interest
at 5.3125% per annum;
4)
Deposit under SA No. 3301-0145-61 issued on September 10, 1991 in the name(s) of Manuel
Fernandez or Baby Fernandez or Monique Fernandez in the amount of P11,369,800.78 with
interest at 5% per annum.5
7
The deposits were subject to the following conditions:
"x x x
Pre-termination of deposits prior to maturity shall be subject to discretion of [BPI] and if pre-
termination is allowed, it is subject to an interest penalty to be determined on the date of pre-
termination;ChanRoblesVirtualawlibrary
Endorsement and presentation of the Certificate of Deposit is necessary for the renewal or
termination of the deposit"
On September 24, 1991, Tarcila went to the BPI Shaw Blvd. Branch to pre-terminate these joint
AND/OR accounts. She brought with her the certificates of time deposit and the passbook, and
presented them to the bank. BPI, however, refused the requested pre-termination despite
Tarcila's presentation of the covering certificates. Instead, BPI, through its branch manager, Mrs.
Elma San Pedro Capistrano (Capistrano), insisted on contacting Manuel, alleging in this regard
that this is an integral part of its standard operating procedure.6
Shortly after Tarcila left the branch, Manuel arrived and likewise requested the pre-termination
of the joint AND/OR accounts.7 Manuel claimed that he had lost the same certificates of deposit
that Tarcila had earlier brought with her.8 BPI, through Capistrano, this time acceded to the pre-
termination requests, blindly believed Manuel's claim,9 and requested him to accomplish BPI's
pro-forma affidavit of loss.10
Two days after, Manuel returned to BPI, Shaw Blvd. Branch to pre-terminate the joint AND/OR
accounts. He was accompanied by Atty. Hector Rodriguez, the respondent Dalmiro Sian (Sian),
and two (2) alleged National Bureau of Investigation (NBI) agents.
In place of the actual certificates of deposit, Manuel submitted BPI's pro-forma affidavit of loss
that he previously accomplished and an Indemnity Agreement that he and Sian executed on the
same day. The Indemnity Agreement discharged BPI from any liability in connection with the
pre-termination.11Notably, none of the co-depositors were contacted in carrying out these
transactions.
On the same day, the proceeds released to Manuel were funneled to Sian's newly opened
account with BPI. Immediately thereafter, Capistrano requested Sian to sign blank withdrawal
slips, which Manuel used to withdraw the funds from Sian's newly opened account.12Sian's
account, after its use, was closed on the same day.13
A few days after these transactions, Tarcila filed a petition for "Declaration of Nullity of
Marriage, etc." against Manuel, with the Regional Trial Court (RTC) of Pasig, docketed as JRDC
No. 2098.14 Based on the records, this civil case has been archived.15
Tarcila never received her proportionate share of the pre-terminated deposits,16 prompting her
to demand from BPI the amounts due her as a co-depositor in the joint AND/OR accounts. When
her demands remained unheeded, Tarcila initiated a complaint for damages with the Regional
Trial Court (RTQ of Makati City, Branch 59, docketed as Civil Case No. 95-671.
In her complaint, Tarcila alleged that BPI's payments to Manuel of the pre-terminated deposits
were invalid with respect to her share.17She argued that BPI was in bad faith for allowing the
pre-termination of the time deposits based on Manuel's affidavit of loss when the bank had
actual knowledge that the certificates of deposit were in her possession.18
In its answer, BPI alleged that the accounts contained conjugal funds that Manuel exclusively
funded.19 BPI further argued that Tarcila could not ask for her share of the pre-terminated
deposits because her share in the conjugal property is considered inchoate until its
dissolution.20 BPI further denied refusing Tarcila's request for pre-termination as it processed
her request but she left the branch before BPI could even contact Manuel.
BPI likewise filed a third-party complaint against Sian and Manuel on the basis of the Indemnity
Agreement they had previously executed. As summons against Manuel remained unserved,21
only BPI's complaint against Sian proceeded to trial.
During the pre-trial, the parties admitted, among others, the conjugal nature of the funds
deposited with BPI.
After trial on the merits, the RTC of Makati, Branch 59, ruled in favor of Tarcila and awarded her
the following amounts: 1.) 1/2 of US$36,379.87; 2.) 1/3 of P11,3369,800.78; 3.) 1/3 of
Php1,684,661.40; and 1/3 of P1,534,335.10. The RTC likewise ordered BPI to pay Tarcila the
amount of P50,000.00 representing exemplary damages and P500,000.00 as attorney's fees.
In its decision,22 the RTC opined that the AND/OR nature of the accounts indicate an active
solidarity that thus entitled any of the account holders to demand from BPI payment of their
proceeds. Since Tarcila made the first demand upon BPI, payments should have been made to
her23 under Article 1214 of the Civil Code, which provides:
"Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or
extrajudicial, has been made by one of them, payment should be made to him."
The RTC did not find merit either in BPI's third-party complaint against Sian on the ground that
he was merely coerced into signing the Indemnity Agreement.24 BPI appealed the RTC ruling
with the CA.
8
CA Ruling
On July 14, 2005, the CA denied BPFs appeal through the decision25 that BPI now challenges
before this Court. The CA ruled that as a co-depositor and a solidary creditor of joint "AND/OR"
accounts, BPI did not enjoy the prerogative to determine the source of the deposited funds and
to refuse payment to Tarcila on this basis.
The CA also found that BPI had acted in bad faith in allowing Manuel to pre-terminate the
certificates of deposits and in facilitating the swift funneling of the funds to Sian's account, which
allowed Manuel to withdraw them.26 The CA noted that the transactions were accomplished in
one sitting for the purpose of misleading anyone who would try to trace Manuel's deposit
accounts.27
The CA likewise upheld the RTC's dismissal of BPFs third-party complaint against Sian. It affirmed
the factual finding that intimidation and undue influence vitiated Sian's consent in signing the
Indemnity Agreement.28
BPI moved for the reconsideration of the CA ruling, but the appellate court denied its motion in
its June 14, 2006 Resolution.29 BPI then filed the present petition for review on certiorari under
Rule 45 with this Court.
The Petition and Comment
BPI insists in its present petition30 that the CA and the court a quo erred in applying the
provisions of Article 1214 of the Civil Code to the present case. It believes that the CA should
have relied on the conjugal partnership of gains provision in view of the existing marriage
between the spouses. Accordingly, BPI argues that Tarcila could not have suffered any damage
from its payment of the proceeds to Manuel inasmuch as the proceeds of the pre-terminated
accounts formed part of the conjugal partnership of gains.
BPI likewise claims that it did not breach its obligations under the certificates of deposit; it
processed Tarciia's pre-termination request but she left the branch before her request could be
completed. Moreover, assuming without conceding that BPI indeed declined Tarciia's request,
it posits that it possessed the discretion to do so since the request for pre-termination was done
prior to their maturity dates. Thus, BPI firmly believes that it could not be accused of wanton,
fraudulent, reckless, or malevolent conduct as it was merely exercising its rights.
Finally, BPI insists that Sian's consent was not vitiated when he signed the Indemnity Agreement.
According to BPI, the records are bereft of any proof that Sian was actually threatened to sign
the Indemnity Agreement. Thus, BPI maintains that it may validly invoke the Agreement to
release itself from any liability.
In her Comment,31 Tarcila points out that the petition raised questions of fact that are not
proper issues in a petition for review on certiorari.32 She also argues that BPI's acts were not
mere precautionary steps but were indicia of bias and bad faith. Finally, Tarcila adds that the
issue of who has management, control, and custody of conjugal property cannot be set up to
justify BPI's patent bad faith.
Sian failed to file his Comment on the petition. Nevertheless, he filed a Memorandum33 in
compliance with the Court's September 22, 2008 Resolution.34 He alleged that Manuel forced
and intimidated him to sign the Indemnity Agreement.
THE COURT'S RULING
We deny the petition for lack of merit.
BPI breached its obligation under the certificates of deposit.
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor,
to the order of the depositor, or to some other person or his order, whereby the relation of
debtor and creditor between the bank and the depositor is created.35 In particular, the
certificates of deposit contain provisions on the amount of interest, period of maturity, and
manner of termination. Specifically, they stressed that endorsement and presentation of the
certificate of deposit is indispensable to their termination. In other words, the accounts may
only be terminated upon endorsement and presentation of the certificates of deposit. Without
the requisite presentation of the certificates of deposit, BPI may not terminate them.
BPI thus may only terminate the certificates of deposit after it has diligently completed two
steps. First, it must ensure the identity of the account holder. Second, BPI must demand the
surrender of the certificates of deposit.
This is the essence of the contract entered into by the parties which serves as an accountability
measure to other co-depositors. By requiring the presentation of the certificates prior to
termination, the other depositors may rely on the fact that their investments in the interest-
yielding accounts may not be indiscriminately withdrawn by any of their co-depositors. This
protective mechanism likewise benefits the bank, which shields it from liability upon showing
that it released the funds in good faith to an account holder who possesses the certificates.
9
Without the presentation of the certificates of deposit, BPI may not validly terminate the
certificates of deposit.
With these considerations in mind, we find that BPI substantially breached its obligations to the
prejudice of Tarcila. BPI allowed the termination of the accounts without demanding the
surrender of the certificates of deposits, in the ordinary course of business. Worse, BPI even had
actual knowledge that the certificates of deposit were in Tarcila's possession and yet it chose to
release the proceeds to Manuel on the basis of a falsified affidavit of loss, in gross violation of
the terms of the deposit agreements.
As we have stressed in the case of FEBTC v. Querimit:36
"x x x A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without
its production and surrender after proper indorsement. As a rule, one who pleads payment has
the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is
that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove
payment. The debtor has the burden of showing with legal certainty that the obligation has been
discharged by payment, x x x Petitioner should not have paid respondent's husband or any third
party without requiring the surrender of the certificates of deposit."37
BPI tried to muddle the issue by claiming that the funds subject of the deposits were conjugal in
character. This contention, however, is misleading. The principal issue involved in the present
case is BPFs breach of its obligations under the express terms of the certificates of deposit and
the consequent damage that Tarcila suffered as a co-depositor because of BPI's acts.
Notably, BPI effectively deprived Tarcila and the other co-depositors of their share in the
proceeds of the certificates of deposits. As the CA noted in the assailed Decision, the series of
transactions were accomplished in one sitting for the purpose of misleading anyone who would
try to trace the proceeds of [Manuel]'s deposit accounts.38 As the court a quo likewise
observed:
"Aside from the affidavit of loss, the bank required [Manuel] to execute an Indemnity
Agreement. Hence, on September 26, 1991, [Manuel] returned to the bank. This time, Dalmiro
Sian, his son-in-law, Atty. Hector Rodriguez, his lawyer, and two NBI agents were with him.
There, the bank required him and Sian to sign an Indemnity Agreement whereby they undertook
"to hold the bank free and harmless from all liabilities arising from said [pre-termination]." The
agreement was prepared by one of the officers of the bank. At the same time, Sian was told to
open a new account under his name. The opening of a new account N. 3305-0539-44 in the
name of Sian was facilitated. The proceeds of the four deposit accounts were then transferred
or deposited to this new account in the name of Sian. x x x Sian also signed two blank withdrawal
slips. With the use of these withdrawal slips, [Manuel] Fernandez withdrew all the proceeds
deposited under the name of Sian. Shortly thereafter, account no. 3305-0539-44 was closed."39
It appears that BPI connived with Manuel to allow him to divest his co-depositors of their share
in proceeds. Worse, it cooperated with Manuel in trying to conceal this fraudulent conduct by
making it appear that the funds were withdrawn from another account.
The CA correctly ruled that BPI is guilty of bad faith.
We affirm the CA and the trial court's findings that BPI was guilty of bad faith in these
transactions. Bad faith imports a dishonest purpose and conscious wrongdoing.40 It means a
breach of a known duty through some motive or interest or ill will.41
A review of the records of the case show ample evidence supporting BPI's bad faith, as shown
by the clear bias it had against Tarcila. As the CA observed:
"The bias and bad faith on the part of [BPI]'s officers become readily apparent in the face of the
fact that [BPI]'s officers did not require the presentation of the certificates of deposit from
[Manuel] but even assisted and facilitated the pre-termination transaction by the latter on the
basis of a mere pro-forma and defective affidavit of loss, which the bank itself supplied, despite
the fact that [BPI]'s officers were fully aware that the certificates were not lost but in the
possession of [Tarcila]. Moreover, given the fact that said affidavit of loss was executed by
[Manuel] just a few minutes after [Tarcila] had presented the certificates of deposit to [BPI], it
taxes one's credulity to say that [BPI] believed in good faith that the certificates were indeed
lost."42
Similarly, the trial court observed:
"It is quite alarming to note the eagerness and haste by which the defendant bank
accommodated [Manuel] 's request for the pre-termination of the questioned account deposits
and the subsequent release to him of the full proceeds thereof, to the exclusion of the [Tarcila].
The prejudice of the officers of [BPI] against the [Tarcila] is very apparent. Elma Capistrano,
branch manager, categorically testified that [Tarcila] is a client of the bank only in name; and
that she does not consider [Tarcila] as a primary depositor to the account because the source of
the money being deposited and being transacted was [Manuel]."43
BPI argues that it merely took precautionary steps when it insisted on contacting Manuel as a
form of standard operating procedure. This assertion, however, is belied by BPI's own witness.
During her testimony, Capistrano narrated:
"x x x
Q:
Can you tell us why it was necessary for the branch to get in touch with Mr. Manuel Fernandez?
A:
Because he is the one that handles and is in control of all the money deposited in the branch44
xxx
Q:
10
I heard you mentioned the word "primary depositor" does that mean that Mrs. Tarcila
Fernandez is not a primary depositor?
A:
Personally, I do not really consider her as the primary depositor to the account because the
source of the money being deposited and being transacted was Mr. Manuel Fernandez.45
xxx
Q:
Were you the one who recommended that Mr. Manuel Fernandez prepare this affidavit of loss?
A:
That is the usual things that we tell our clients if the original of the certificates of deposits (sic)
or passbook or checkbooks are missing.
Q:
But is it not a fact that earlier a few minutes before Mr. Fernandez came, you were aware that
the certificates were not actually missing but were in the possession of Mrs. [Tarcila] Fernandez,
is it not?
A:
Yes Sir.
Q:
And yet when this affidavit of loss was later prepared and presented to you, did you give due
course to this affidavit of loss? Did you accept the truth of the contents of this affidavit of loss?
A:
Because it is Mr. [Manuel] Fernandez who is in possession of all the certificates, and if he is
missing it, I believed that it is really missing."46
The records thus abound with evidence that BPI clearly favored Manuel. BPI considered Manuel
as the primary depositor despite the clear import of the nature of their AND/OR account, which
permits either or any of the co-depositors to transact with BPI, upon the surrender of the
certificates of deposit. Worse, BPI facilitated the scheme in order to allow Manuel to obtain the
proceeds and conceal any evidence of wrongdoing.
BPI did not only fail to exercise that degree of diligence required by the nature of its business, it
also exercised its functions with bad faith and manifest partiality against Tarcila. The bank even
recognized an affidavit of loss whose allegations, the bank knew, were false. This aspect of the
transactions opens up other issues that we do not here decide because they are outside the
scope of the case before us.
One aspect is criminal in nature because Manuel swore to a falsity and the act was with the
knowing participation of bank officers. The other issue is administrative in character as these
bank officers betrayed the trust reposed in them by the bank. We mention all these because
these are disturbing acts to observe in a banking institution as large as the BPI.
BPI is sternly reminded that the business of banks is impressed with public interest. The fiduciary
nature of their relationship with their depositors requires it to treat the accounts of its clients
with the highest degree of integrity, care and respect. In the present case, the manner by which
BPI treated Tarcila also transgresses the general banking law47 and Article 19 of the Civil Code,
which directs every person, in the exercise of his rights, "to give everyone his due, and observe
honesty and good faith."
BPI could not invoke the Indemnity Agreement.
BPI assails the CA's declaration voiding the Indemnity Agreement that would allow it to hold
Sian liable for the withdrawn deposits.48 It argues that Sian's allegation of vitiation of consent
should not be recognized as it is based solely on the presence of Manuel's lawyer and two (2)
alleged NBI Agents.49 BPI thus claims that "mere presence" of law enforcement officers cannot
be reasonably equated as imminent threat.50
This particular issue involves a factual determination of vitiated consent, which is a question of
fact and one which is not generally appropriate in a petition for review on certiorari under Rule
45. We, however, are not precluded from again examining the evidence introduced and
considered with respect to this factual issue where the CA's finding of vitiated consent is both
speculative and mistaken.51
We agree with BPFs observation on this point that there is nothing in the records that even
remotely resembles vitiation of consent. In order that intimidation may vitiate consent, it is
essential that the intimidation was the moving cause for giving consent.52 Moreover, the
threatened act must be unjust or unlawful.53 In addition, the threat must be real or serious, and
must produce well-grounded fear from the fact that the person making the threat has the
necessary means or ability to inflict the threat.54
Nothing in the records supports this conclusion. In fact, we find it difficult to believe that the
presence of Manuel, his lawyer, and two (2) NBI agents could amount to intimidation in the
absence of any act or threatened injury on Sian. If he did sign the Indemnity Agreement with
reluctance, vitiation of consent is still negated, as we held in Vales v. Villa:55
"There must, then, be a distinction to be made between a case where a person gives his consent
reluctantly and even against his good sense: and judgment, and where he, in reality, gives no
consent at all, as where he executes a contract or performs an act against his will under a
pressure which he cannot resist. It is clear that one acts as voluntarily and independently in the
eye of the law when he acts reluctantly and with hesitation as when he acts spontaneously and
joyously. Legally speaking he acts as voluntarily and freely when he acts wholly against his better
sense and judgment as when he acts in conformity with them. Between the two acts there is no
difference in law. But when his sense, judgment, and his will rebel and he refuses absolutely to
11
act as requested, but is nevertheless overcome by force or intimidation to such an extent that BPI and Sian are in pari delicto, thus, no affirmative relief should be given to one against the
he becomes a mere automation and acts mechanically only, a new element enters, namely, a other. BPI came to court with unclean hands; for which reason, it cannot obtain relief and
disappearance of the personality of the actor. He ceases to exist as an independent entity with thereby gain from its indispensable participation in the irregular transaction. One who seeks
faculties and judgment, and in his place is substituted another the one exercising the force or equity and justice must come to court with clean hands.59chanroblesvirtuallawlibrary
making use of intimidation. While his hand signs, the will which moves it is another's. While a
contract is made, it has, in reality and in law, only one party to it; and, there being only one Award of exemplary damages proper
party, the one using the force or the intimidation, it is unenforceable for lack of a second party.
Exemplary or corrective damages are imposed by way of example or correction for the public
From these considerations it is clear that every case of alleged intimidation must be examined good, in addition to moral, temperate, liquidated, or compensatory damages.60 In quasi-delicts,
to determine within which class it falls. If it is within the first class it is not duress in law, if it falls exemplary damages may be granted if the defendant acted with gross negligence.61
in the second, it is."
This notwithstanding, we hold that BPI may still not invoke the provisions of the Indemnity In the present case, BPI's bias and bad faith unquestionably caused prejudice to Tarcila. The law
Agreement on the basis of in pari delicto - it was equally at fault. In pari delicto is a legal doctrine allows the grant of exemplary damages in cases such as this to serve as a warning to the public
resting on the theory that courts will not aid parties who base their cause of action on their own and as a deterrent against the repetition of this kind of deleterious actions.62 From this
immoral or illegal acts.56 When two parties, acting together, commit an illegal or wrongful act, perspective, we find that the CA did not err in affirming the RTC's award of P50,000.00 by way
the party held responsible for the act cannot recover from the other, because both have been of exemplary damages.
equally culpable and the damage resulted from their joint offense.57
Attorney's fees in order
In the present case, equity dictates that BPI should not be allowed to claim from Sian on the
basis of the Indemnity Agreement. The facts unmistakably show that both BPI and Sian In view of the award of exemplary damages, we find that that the CA did not err in confirming
participated in the deceptive scheme to allow Manuel to withdraw the funds. As succinctly the RTC's award of attorney's fees, in accordance with Article 2208 (1) of the Civil Code. We find
admitted by Capistrano during her testimony: the award of attorney's fees, equivalent to P500,000.00, to be just and reasonable under the
xxx circumstances.
Q:
I see, in other words, the same certificates of deposit earlier presented by Mrs. Tarcila were WHEREFORE, premises considered, the petition is hereby DENIED.
recognized by the bank as having been lost and thereafter transactions were made in favor of
Mr. Manuel Fernandez, that was what happened? Costs against the petitioner.
A:
Yes Sir, because of the representation of Mr. Manuel Fernandez that he lost it. SO ORDERED.
Q:
You accepted, the bank immediately accepted in face value that representation?
A:
Yes Sir.58
BPI knew very well the irregularity in Manuel's transaction for it had actual knowledge that the
certificates of deposit were in Tarcila's possession. Because of this knowledge, it entertained the
possibility of reprisal from the co-depositors. Thus, it took shrewdly calculated steps and
required Manuel and Sian to execute an Indemnity Agreement, hoping that this instrument
would absolve it from liability.

12
 G.R. No. 157845 September 20, 2005
PHILIPPINE NATIONAL BANK, Petitioners,
vs.
NORMAN Y. PIKE, Respondent.
DECISION
CHICO-NAZARIO, J.:
This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, seeks to reverse the Decision1 dated 19 December 2002, and the Resolution2 dated
02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with
modification the Decision3 rendered by the Regional Trial Court (RTC), Branch 07 of Manila,
dated 10 January 1997, in Civil Case No. 94-68821 in favor of herein respondent Norman Pike
(Pike).
The case stemmed from a complaint4 filed by herein respondent Pike for damages5 against
Philippine National Bank (PNB) on 04 January 1994.
Complainant Pike often traveled to and from Japan as a gay entertainer in said country.
Sometime in 1991, he opened U.S. Dollar Savings Account No. 0265-704591-0 with herein
petitioner PNB Buendia branch for which he was issued a corresponding passbook. The
complaint alleged in substance that before complainant Pike left for Japan on 18 March 1993,
he kept the aforementioned passbook inside a cabinet under lock and key, in his home; that on
19 April 1993, a few hours after he arrived from Japan, he discovered that some of his valuables
were missing including the passbook; that he immediately reported the incident to the police
which led to the arrest and prosecution of a certain Mr. Joy Manuel Davasol; that complainant
Pike also discovered that Davasol made two (2) unauthorized withdrawals from his U.S. Dollar
Savings Account No. 0265-704591-0, both times at the PNB Buendia branch on the following
dates:
DATE
AMOUNT
31 March 1993
$3,500.00
05 April 1993
4,000.00
TOTAL
$7,500.00
that on several occasions, complainant Pike went to defendant PNBs Buendia branch and
verbally protested the unauthorized withdrawals and likewise demanded the return of the total
withdrawn amount of U.S. $7,500.00, on the ground that he never authorized anybody to
withdraw from his account as the signatures appearing on the subject withdrawal slips were
clearly forgeries; that defendant PNB refused to credit said amount back to complainants U.S.
Dollar Savings Account without justifiable reason, and instead, defendant bank wrote him that
it exercised due diligence in the handling of said account; and that on 06 May 1993, complainant
Pike wrote defendant PNB simply to request that the hold-account be lifted so that he may
withdraw the remaining balance left in his U.S.$ Savings Account and nothing else.
On the other hand, defendant PNB alleged, in its Motion to Dismiss6 of 18 April 1994, a
counterstatement of facts. Its factual allegations read:
. . . On March 15, 1993 at PNB Buendia Branch, Mr. Norman Y. Pike, together with a certain Joy
Davasol went to see PNB AVP Mr. Lorenzo T. Val (sic), Jr. purposely to withdraw the amount of
$2,000.00. Mr. Pike also informed AVP Val that he is leaving for abroad (Japan) and made verbal
instruction to honor all withdrawals to be transmitted by his Talent Manager and
Choreographer, Joy Davasol who shall present pre-signed withdrawal slips bearing his (Pikes)
signature. . .
On April 19, 1993, a certain Josephine Balmaceda, who claimed to be plaintiffs sister executed
an affidavit . . . . stating therein that they discovered today (April 19, 1993) the lost (sic) of her
brothers passbook issued by PNB on account of robbery, committed in the residence/office of
her brother, promptly reporting the matter to the police authorities and her brother cannot
report the matter to the Bank because he was currently in Japan and therefore requesting the
Bank to issue a hold-order on her brothers passbook.
But a copy of an alarm (Police) Report dated April 19, 1993. . . stated that plaintiff (who was the
one who reported the matter) after one month in Japan, he (complainant) arrived yesterday. . .
On April 26, 1993, Atty. Nathaniel Ifurung who claims to be plaintiffs counsel sent a demand
letter to VP Violeta T. Suquila (then VP and Manager of PNB Buendia Branch) demanding the
13
bank to credit back the amount of US$7,500.00 which were withdrawn on March 31, 1993 and
April 5, 1993, because his clients signatures were forged and the withdrawal made thereon No. H918022
were unauthorized. . .
Issued at Manila on
On May 5, 1993, Mr. Norman Y. Pike executed an affidavit of loss (sic) Dollar Account Passbook
and requested the PNB to replace the same and allow him to make withdrawals thereon. He Sept. 6, 1990
stated that his passbook was stolen together with other valuables which he discovered only in
the early morning of April 19, 1993. . . Place of Issuance

On May 6, 1993, plaintiff Norman Y. Pike wrote a letter. . . addressed to the Manager of PNB, On the same day May 6, 1993 Plaintiff Norman Y. Pike was allowed by defendant bank to
Buendia Branch the full contents of said letter hereto quoted as follows: withdraw the remaining balance from his passbook .

May 6, 1993 A letter dated May 18, 1993 was sent to Plaintiffs counsel by PNB stating that the Bank
regrets that it cannot accede to such request inasmuch as the Bank exercised due diligence of a
The Manager good father to his family in the handling of transactions covering the deposit account of Mr. Pike
.
Philippine National Bank
On July 2, 1993, Plaintiffs counsel sent a letter to PNB Vice Pres. Suquila denying that his client
Buendia Branch made any such promise not to hold responsible the bank and its officers for the withdrawal
made .
Paseo de Roxas cor. Gil Puyat Street
A letter dated July 29, 1993 was sent to Plaintiffs counsel by VP Suquila stating that plaintiffs
Makati, Metro Manila withdrawal of the remaining balance of his account with the Bank effectively estops him from
claiming on the alleged unauthorized withdrawals.
Sir:
The trial court, in its decision dated 10 January 1997, made the following findings of fact:
In connection with the request of my sister, Mrs. Josephine P. Balmaceda for the hold-order on
my dollar savings passbook No. 265-704591-0, I am now requesting your good office to lift the . . . [T]hat the bank is responsible for such unauthorized withdrawals. The court is not impressed
same so I can withdraw the remaining balance of my passbook which was reported lost with the defense put up by the bank. Its contention that the withdrawals were authorized by
sometime in March of this year. the plaintiff because there was an arrangement between the bank represented by its Asst. Vice
President Lorenzo Bal, Jr. and the depositor Norman Y. Pike to the effect that pre-signed
I also promise not to hold responsible the bank and its officers for the withdrawal made on my withdrawal slips, that is, withdrawal slip signed by the depositor in the presence of Mr. Bal
dollar savings passbook on March 19 and April 5, 1993 respectively as a result of the lost (sic) of whereby it would be made to appear that it was the depositor himself who presented the same
my passbook. to the bank despite the fact that it was another person who presented the same should be
honored by the bank cannot be sanctioned by the court. Firstly, the court is not satisfied that
Sgd. NORMAN Y. PIKE there was indeed such an arrangement. . . It is Mr. Bals contention that such an arrangement
although not ordinarily entered into is still a legal procedure of the bank and is resorted to
Depositor accommodate the depositors specially honored and valued depositor at that.

Philippine Passport ...

14

The court compared the signatures in the questioned withdrawal slips with the known
signatures of the depositor and is convinced that the signatures in the unauthorized withdrawal
slips do not correspond to the true signatures of the depositor.
From the evidence that it received, the court is convinced that the bank was negligent in the
performance of its duties such that unauthorized withdrawals were made in the deposit of
plaintiff Norman Y. Pike.7
The dispositive portion of the trial courts decision reads:
WHEREFORE and considering the foregoing, judgment is hereby rendered in favor of the plaintiff
and against the defendant and ordering the defendant to pay the following:
1. US$7,500.00 plus interest thereon at the rate of 12% per annum until the full amount is paid;
2. P25,000.00 for and as attorneys fees;
3. P50,000.00 as moral damages and P50,000.00 as exemplary damages; and
4. Plus the costs of suit.8
Defendant PNBs motion for reconsideration was subsequently denied by the court a quo.9
On appeal, the Court of Appeals issued the assailed decision dated 19 December 2002, affirming
the findings of the RTC that indeed defendant-appellant PNB was negligent in exercising the
diligence required of a business imbued with public interest such as that of the banking industry,
however, it modified the rate of interest and award for damages, to wit:
WHEREFORE, premises considered, the Decision dated January 10, 1997 issued by the Regional
Trial Court of Manila, Branch 7, in Civil Case No. 94-68821, is hereby AFFIRMED with
MODIFICATION, as follows:
1. Ordering appellant, the Philippine National Bank, Buendia Branch, to refund appellee the
amount of $7,500.00 plus interest of 6% per annum to be computed from the date of the filing
of the complaint which interest rate shall become 12% per annum from the time the judgment
in this case becomes final and executory until its satisfaction;
2. The award for moral damages is reduced to P20,000.00; and
3. The award for exemplary damages is likewise reduced to P20,000.00.
Costs against appellant.10
The appellate court held that:
Appellant claims that appellee personally talked to its officers to allow Joy Manuel Davasol to
make withdrawals. Appellee even left pre-signed withdrawal slips before he went to Japan.
However, appellant could have told appellee to authorize the withdrawal by a representative by
indicating the same at the space provided at the back portion of the withdrawal slip. This
operational flaw was observed by the trial court, when it ruled:
The court cannot also understand why the bank did not require the correct, proper and the usual
procedure of requiring a depositor who is withdrawing the money through a representative to
fill up the back portion of the withdrawal slips, which form was issued by the bank itself.
A perusal of the records discloses that appellee had previously authorized withdrawals by a
representative. However, these withdrawals were properly accompanied by a "withdrawal by a
representative" form aside from a handwritten request by appellee to allow such withdrawals
by his representative, or a typewritten letter-request for withdrawal by a representative.
Certainly, appellant lacked the due care and caution required of managers and employees of a
firm engaged in so sensitive and demanding business as banking.
In its desire to be exonerated from liability, appellant advances the argument that, granting
negligence on its part, appellee condoned this negligence as shown in his letter dated May 6,
1993, wherein appellee purportedly undertook, not to hold the bank and its officers responsible
for the unauthorized withdrawals from his account.
We do not agree. It should be emphasized that while the appellee admitted signing the letter
dated May 6, 1993, he, however, denied having undertook (sic) to exonerate the appellant from
liability for the unauthorized withdrawals. Appellee questioned the second paragraph of the said
letter as being superimposed so that his signature overlapped the text of the second paragraph
of said letter. A waiver of right, in order to be valid, should be in a language that clearly manifests
his desire to do so. In the instant case, appellees filing of the instant action is inconsistent
with appellants contention that he had waived his right to question appellants negligent act of
allowing the unauthorized withdrawals from his account.11
Defendant-appellant PNB filed a motion for reconsideration. In a Resolution dated 02 April 2003,
the Court of Appeals denied said motion.
15
Hence, this petition.
Petitioner PNB now seeks the review of the aforequoted decision and resolution of the Court of
Appeals predicated on the following issues:
I.
WHETHER OR NOT THE PRINCIPLE OF ESTOPPEL WAS NOT PROPERLY APPLIED IN THIS CASE;
II.
WHETHER OR NOT RESPONDENT HAVE SUBSTANTIALLY PROVEN THAT THE SIGNATURES
APPEARING ON THE TWO (2) QUESTIONED PRE-SIGNED WITHDRAWAL SLIP FORMS ARE ALL
FORGERIES IN ACCORDANCE WITH SECTION 22, RULE 132 OF THE REVISED RULES OF COURT;
and
III.
WHETHER OR NOT MORAL AND EXEMPLARY DAMAGES CAN BE AWARDED AGAINST A PARTY IN
GOOD FAITH.
Petitioner PNB contends that due to the verbal instructions12 of respondent Pike, a valued
depositor, it allowed the withdrawal by another person. Plus, the fact that said respondent
withdrew the remaining balance in his US Savings Account and executed a waiver releasing
petitioner PNB from any liability due to the loss of the funds should rightly negate a finding of
negligence on its part. Accordingly, petitioner PNB claims that the appellate court, as well as the
trial court erred in holding that the withdrawals in question were unauthorized as the signatures
appearing on the subject withdrawal slips were forgeries. Petitioner PNB, therefore, argues that
it should not be held liable for the amount withdrawn from the account of respondent Pike in
the sum of $7,500.00, as well as for moral and exemplary damages.
A priori, it is quite evident that the petition is anchored on a plea to review or re-examine the
factual conclusions reached by the trial court and affirmed by the Court of Appeals, and for this
Court to hold otherwise. Whether:
1) respondent Pikes signatures appearing on the pertinent withdrawal slips used by Joy Manuel
Davasol13 to withdraw the amount of $7,500.00, were forgeries, as found by the trial court and
affirmed by the Court of Appeals, or were authentic as claimed by petitioner bank; and
2) respondent Pike in fact executed a waiver absolving petitioner bank from any legal
responsibility due to the unauthorized withdrawals, as maintained by petitioner bank, or the
paragraph containing said waiver was intercalated by some other person, thus, amounting no
waiver at all, as held by the courts a quo.
are questions of fact and not of law. Inexorably, these issues call for an inquiry into the facts and
evidence on record. This, as we have so often held, we cannot do.
Elementary is the rule that this Court is not the appropriate venue to consider anew the factual
issues as it is not a trier of facts, and, it generally does not weigh anew the evidence already
passed upon by the Court of Appeals.14 When this Court is tasked to go over once more the
evidence presented by both parties, and analyze, assess and weigh them to ascertain if the trial
court and the appellate court were correct in according superior credit to this or that piece of
evidence of one party or the other, the Court cannot and will not do the same.15 Such task is
foreclosed by the rule enunciated under Section 1 of Rule 4516 of the Rules of Court:
SECTION 1. Filing of petition with Supreme Court. - . . . The petition shall raise only questions of
law17 which must be distinctly set forth.
We have oft "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,"18 and in the absence of any showing that the
findings complained of are totally devoid of support in the evidence on record, or that they are
so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand. The
courts a quo are in a much better position to evaluate properly the evidence.
Finding no other alternative but to affirm their finding that petitioner PNB negligently allowed
the unauthorized withdrawals subject of the case at bar, the instant petition for review must
necessarily fail.
At this juncture, it bears emphasizing that negligence of banking institutions should never be
countenanced. The negligence here lies in the lackadaisical attitude exhibited by employees of
petitioner PNB in their treatment of respondent Pikes US Dollar Savings Account that resulted
in the unauthorized withdrawal of $7,500.00. Nevertheless, though its employees may be the
ones negligent, a banks liability as an obligor is not merely vicarious but primary, as banks are
expected to exercise the highest degree of diligence in the selection and supervision of their
employees,19 and having such obligation, this Court cannot ignore the circumstances
surrounding the case at bar how the employees of petitioner PNB turned their heads, nay,
closed their eyes to the suspicious circumstances enfolding the two withdrawals subject of the
case at bar. It may even be said that they went out of their ways to disregard standard operating
16
procedures formulated to ensure the security of each and every account that they are handling.
Petitioner PNB does not deny that the withdrawal slips used were in breach of standard
operating procedures of banks in the ordinary and usual course of banking operations as
testified to by one of its witnesses, Mr. Lorenzo T. Bal, Assistant Vice President of Petitioner
PNBs Buendia branch, on cross-examination20 he stated thus:
Q: Mr. Witness, when the original of Exhibit "B"21 was presented to you for approval, how many
signatures of depositor appears thereon?
A: Two (2) signatures appears (sic) on the face of the withdrawal slip.
Q: When it (sic) was (sic) presented to you immediately?
A: Yes, sir.
Q: Are you sure of that?
A: Yes, sir. Because it was pre signed withdrawal slip.
Q: What does the signature appear, the word recipient means?
A: Received.
Q: So, what you are saying is that, the depositor here signed this even before receiving the
amount?
A: Because before the withdrawal was made, Mr. Pike, the depositor came to the bank when he
withdrew the $2,000.00 and instructed me or requested us even the supervisor to honor all
withdrawal slip.
Q: And this is a regular procedure?
A: Yes, sir.
Q: Are you sure of that?
A: Yes, sir.
Q: Do you have written manual on this particular procedure, Mr. Witness?
A: Of course, that includes in the Rules and regulations of the bank.
Q: Are you are (sic) are very sure of that?
A: And banking is a fast transaction between the depositor and the bank.
Q: And then, is the use of the back portion of the withdrawal slip with a heading of
authorization?
A: Normally, a depositor and the bank agrees on certain terms that if you allow withdrawal from
his account, his or her account, its enough that the signature of the depositor appears on both
spaces in the front side of the withdrawal slip. Even if you do not have the back portion of the
withdrawal slip.
Q: You are very sure of that?
A: Yes, sir.
Q: And that has been done with the other withdrawal slip of Norman Pike as stated or as shown
in the Statement of Account?
A: Yes, sir.
Q: That withdrawal made by representative?
A: Yes, sir.
From the foregoing, petitioner PNBs witness was utterly remiss in protecting the banks client,
as well as the bank itself, when he allowed an account holder to make it appear as if he was the
one actually withdrawing from an account and actually receiving the withdrawn amount.
Ordinarily, banks allow withdrawal by someone who is not the account holder so long as the
account holder authorizes his representative to withdraw and receive from his account by
signing on the space provided particularly for such transactions, usually found at the back of
withdrawal slips. As fittingly found by the courts a quo, if indeed, respondent Pike signed the
withdrawal slips in the presence of Mr. Lorenzo Bal, petitioner PNBs AVP at its Buendia branch,
why did he not call respondent Pikes attention and refer him to the space provided for
authorizing representatives to withdraw from and receive the proceeds of such withdrawal? Or,
at the very least, sign or initial the same so that he could identify the pre-signed withdrawal slips
made by Mr. Pike?
17
Q: You are also saying that on March 15, 1993, you likewise met Joy Manuel Dabasol?
Q: And the picture of the depositor?
A: Yes, sir.
A: Yes, sir.
Q: And you (sic) also saying on March 15, 1993, you also met Norman Pike, the depositor,
Q: And are you familiar with the identity of the depositor Norman Pike?
A: Yes, sir.
A: What particular identity?
Q: And when did you first met (sic) Norman Pike?
Q: His appearance?
A: March 15 when he withdrew $2,000.00.
A: He is gay looking fellow.
Q: That was the first time?
COURT: Answer. You are familiar with his physical appearance?
A: First time, yes.
A: Not so much. Because there are so much depositor (sic) in the bank.23 [Emphasis ours.]
Q: And Mr. Norman Pike was already transacting with you long before that day, is this correct?
For how long was he transacting with you? By his own testimony, the witness negated the very reason for the banks bizarre
"accommodation" of the alleged verbal request of respondent Pike that he was a "valued
A: That was my first time. client." From the aforequoted, it appears that the witness, Lorenzo Bal, was not even reasonably
familiar with respondent Pike, yet, he was ready, willing and able to accommodate the verbal
Q: That was the first time. What I mean is, that he was transacting with the PNB, Buendia Branch request of said depositor. Worse still, the witness still approved the withdrawal transaction
long before you met him? without asking for any proof of identification for the reason that: 1) Davasol was in possession
of a pre-signed withdrawal slip; and 2) the witness "recognized" the signature of respondent
A: Maybe. Pike even after admitting that he did not bother to counter check the signature on the slip
with the specimen signature card of respondent Pike and that he met respondent Pike just once
so that he cannot seem to recall what the latter looks like. The ensuing quoted testimony of the
Q: And the withdrawal made on April 5, 1993 which you approved, you did not look at Exhibit same witness will justify a finding of negligence amounting to bad faith, to wit:
"C", the Savings Signature Card Individual?
Q: And you also met Joy Manuel Dabasol on March 15?
A: We do not look at that, that is kept in the vault.
A: Yes, sir.
Q: Yes or no?
Q: And can you describe Joy Manuel Dabasol?
A: No, sir.
A: I cannot recall his face but then he is a Talent manager, because there are so many depositors
in the bank.
Q: And Mr. witness, Exhibit "C-1"22 which is being kept at your vault, also contains a picture? ...

A: Yes, sir.

18
Q: Mr. witness, you are saying that Mr. Pike, the depositor gave you verbal authority to honor Q: Is that all your basis?
withdrawal by Joy Manuel Dabasol?
A: Yes, sir. Because his signature appears.
A: Yes, sir.
...
Q: Why did you not require then that Mr. Pike instead sign the authorization portion and that
the name of Joy Manuel Dabasol appear thereon with his signature? Q: Mr. witness, this alleged authority given to you by Norman Pike to honor withdrawal by Joy
... Manuel Dabasol, was that in writing?

A: I required Mr. Norman Pike to sign the withdrawal slip on the face of the withdrawal slip. A: It was verbally requested.

Q: But not the authorization portion of the said withdrawal slip? Q: And that is SPO (sic) of PNB, Buendia Branch to accept verbal authorities?
...
A: Yes.
A: No, because that is sufficient already.
Q: Is that Standard Operating Procedure?
Q: And is this your normal procedure, Mr. witness? This particular procedure that you
conducted? A: It is not SPO, but when you knew the client, Your Honor, you have to honor also the trust and
confidence. Let us say if you
A: I dont think so.
Q: According to you, you met Norman Pike only on March 15, 1993 and immediately you allowed
Q: Mr. witness, when on April 5, 1993, when Joy Dabasol came to the office and according to him to withdraw through pre-signed withdrawal slip?
you, you do not remember him, is that correct?
A: Yes, Your Honor. Because a depositor requested you to honor his signature, you have to do
A: I cannot recall his face. that or else willand besides the request is for purpose of expediency, Your Honor. Because
... most often than that, he is out of the country, in Japan. And his Talent Manager is the one
managing the recruiting agency. The money will be used in the operating expenses.
Q: And he just showed you a withdrawal slip, is this correct? ...

A: Yes, on April 5. Q: You did not even bother to look at the Savings Signature Card Individual, yes or no?

Q: Did you require him to produce any Identification Card, yes or no? A: No, sir.24 [Emphases supplied.]

A: No. Having admitted that pre-signed withdrawal slips do not constitute the normal procedure with
respect to withdrawals by representatives should have already put petitioner PNBs employees
Q: And how did you know then that it was Joy Dabasol who was making the withdrawal on April on guard. Rather than readily validating and permitting said withdrawals, they should have
5? proceeded more cautiously. Clearly, petitioner banks employee, Lorenzo T. Bal, an Assistant
Vice President at that, was exceedingly careless in his treatment of respondent Pikes savings
A: Because the presigned withdrawal slip was presented to me. account.

19
From the foregoing, the evidence clearly showed that the petitioner bank did not exercise the
degree of diligence that it ought to have exercised in dealing with their clients.
With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more
than that of a good father of a family considering that the business of banking is imbued with
public interest due to the nature of their functions. The stability of banks largely depends on the
confidence of the people in the honesty and efficiency of banks. Thus, the law imposes on banks
a high degree of obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of banking. Section 2 of Republic Act No. 8791,25 which took
effect on 13 June 2000, makes a categorical declaration that the State recognizes the "fiduciary
nature of banking that requires high standards of integrity and performance."26
Though passed long after the unauthorized withdrawals in this case, the aforequoted provision
is a statutory affirmation of Supreme Court decisions already in esse at the time of such
withdrawals. We elucidated in the 1990 case of Simex International, Inc. v. Court of Appeals,27
that "the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship."28
Likewise, in the case of The Consolidated Bank and Trust Corporation v. Court of Appeals,29 we
clarified that said fiduciary relationship means that the banks obligation to observe "highest
standards of integrity and performance" is deemed written into every deposit agreement
between a bank and its depositor. The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family. Article 1172 of the New Civil
Code states that the degree of diligence required of an obligor30 is that prescribed by law or
contract, and absent such stipulation then the diligence of a family. In every case, the depositor
expects the bank to treat his account with the utmost fidelity, whether such accounts consist
only of a few hundred pesos or of millions of pesos.31
Anent the issue of the propriety of the award of damages in this case, petitioner PNB asseverates
that there was no evidence to prove that respondent Pike "suffered anguish, embarrassment
and mental sufferings"32 due to its acts in allowing the alleged unauthorized withdrawals. And,
having relied on the instructions of a valued depositor, petitioner PNB likewise avers that its
actions were made in good faith, for this reason, there is no factual basis for said award.
Petitioner PNBs assertions fail to impress us.
The award of moral and exemplary damages is left to the sound discretion of the court, and if
such discretion is well exercised, as in this case, it will not be disturbed on appeal.33 In the case
of Philippine Telegraph & Telephone Corporation v. Court of Appeals,34 we had the occasion to
reiterate the conditions to be met in order that moral damages may be recovered. In said case
we stated:
An award of moral damages would require, firstly, evidence of besmirched reputation, or
physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act
or omission factually established; thirdly, proof that the wrongful act or omission of the
defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that
the case is predicated on any of the instances expressed or envisioned by Articles 221935 and
222036 of the Civil Code.
Specifically, in culpa contractual or breach of contract, as here, moral damages are recoverable
only if the defendant has acted fraudulently or in bad faith,37 or is found guilty of gross
negligence amounting to bad faith,38 or in wanton disregard of his contractual obligations.39
Verily, the breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.40
There is no reason to disturb the trial courts finding of petitioner banks employees negligence
in their treatment of respondent Pikes account. In the case on hand, the Court of Appeals
sustained, and rightly so, that an award of moral damages is warranted. For, as found by said
appellate court, citing the case of Prudential Bank v. Court of Appeals,41 "the banks negligence
is a result of lack of due care and caution required of managers and employees of a firm engaged
in so sensitive and demanding business, as banking, hence, the award of 20,000.00 as moral
damages, is proper.
The award of exemplary damages is also proper as a warning to petitioner PNB and all concerned
not to recklessly disregard their obligation to exercise the highest and strictest diligence in
serving their depositors.
Finally, the aforestated grant of exemplary damages entitles respondent Pike the award of
attorney's fees in the amount of P20,000.00 and the award of P10,000.00 for litigation
expenses.42
WHEREFORE, the instant petition is DENIED. The assailed Decision dated 19 December 2002,
and the Resolution dated 02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389,
which affirmed with modification the Decision rendered by the Regional Trial Court (RTC),
Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821, are hereby AFFIRMED
with the modification that petitioner PNB is directed to pay respondent Pike additional 1)
20,000.00 representing attorneys fees; and 2) 10,000.00 representing expenses of litigation.
Costs against petitioner PNB.
SO ORDERED.
20
 G.R. No. 157314 July 29, 2005
FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioners,
vs.
THEMISTOCLES PACILAN, JR., Respondent.
DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari filed by Far East Bank and Trust Company
(now Bank of the Philippines Islands) seeking the reversal of the Decision1 dated August 30,
2002 of the Court of Appeals (CA) in CA-G.R. CV No. 36627 which ordered it, together with its
branch accountant, Roger Villadelgado, to pay respondent Themistocles Pacilan, Jr.2 the total
sum of 100,000.00 as moral and exemplary damages. The assailed decision affirmed with
modification that of the Regional Trial Court (RTC) of Negros Occidental, Bacolod City, Branch
54, in Civil Case No. 4908. Likewise sought to be reversed and set aside is the Resolution dated
January 17, 2003 of the appellate court, denying petitioner banks motion for reconsideration.
The case stemmed from the following undisputed facts:
Respondent Pacilan opened a current account with petitioner banks Bacolod Branch on May
23, 1980. His account was denominated as Current Account No. 53208 (0052-00407-4). The
respondent had since then issued several postdated checks to different payees drawn against
the said account. Sometime in March 1988, the respondent issued Check No. 2434886 in the
amount of 680.00 and the same was presented for payment to petitioner bank on April 4, 1988.
Upon its presentment on the said date, Check No. 2434886 was dishonored by petitioner bank.
The next day, or on April 5, 1988, the respondent deposited to his current account the amount
of 800.00. The said amount was accepted by petitioner bank; hence, increasing the balance of
the respondents deposit to 1,051.43.
Subsequently, when the respondent verified with petitioner bank about the dishonor of Check
No. 2434866, he discovered that his current account was closed on the ground that it was
"improperly handled." The records of petitioner bank disclosed that between the period of
March 30, 1988 and April 5, 1988, the respondent issued four checks, to wit: Check No. 2480416
for 6,000.00; Check No. 2480419 for 50.00; Check No. 2434880 for 680.00 and; Check No.
2434886 for 680.00, or a total amount of 7,410.00. At the time, however, the respondents
current account with petitioner bank only had a deposit of 6,981.43. Thus, the total amount of
the checks presented for payment on April 4, 1988 exceeded the balance of the respondents
deposit in his account. For this reason, petitioner bank, through its branch accountant,
Villadelgado, closed the respondents current account effective the evening of April 4, 1988 as
it then had an overdraft of 428.57. As a consequence of the overdraft, Check No. 2434886 was
dishonored.
On April 18, 1988, the respondent wrote to petitioner bank complaining that the closure of his
account was unjustified. When he did not receive a reply from petitioner bank, the respondent
filed with the RTC of Negros Occidental, Bacolod City, Branch 54, a complaint for damages
against petitioner bank and Villadelgado. The case was docketed as Civil Case No. 4908. The
respondent, as complainant therein, alleged that the closure of his current account by petitioner
bank was unjustified because on the first banking hour of April 5, 1988, he already deposited an
amount sufficient to fund his checks. The respondent pointed out that Check No. 2434886, in
particular, was delivered to petitioner bank at the close of banking hours on April 4, 1988 and,
following normal banking procedure, it (petitioner bank) had until the last clearing hour of the
following day, or on April 5, 1988, to honor the check or return it, if not funded. In disregard of
this banking procedure and practice, however, petitioner bank hastily closed the respondents
current account and dishonored his Check No. 2434886.
The respondent further alleged that prior to the closure of his current account, he had issued
several other postdated checks. The petitioner banks act of closing his current account allegedly
preempted the deposits that he intended to make to fund those checks. Further, the petitioner
banks act exposed him to criminal prosecution for violation of Batas Pambansa Blg. 22.
According to the respondent, the indecent haste that attended the closure of his account was
patently malicious and intended to embarrass him. He claimed that he is a Cashier of Prudential
Bank and Trust Company, whose branch office is located just across that of petitioner bank, and
a prominent and respected leader both in the civic and banking communities. The alleged
malicious acts of petitioner bank besmirched the respondents reputation and caused him
"social humiliation, wounded feelings, insurmountable worries and sleepless nights" entitling
him to an award of damages.
In their answer, petitioner bank and Villadelgado maintained that the respondents current
account was subject to petitioner banks Rules and Regulations Governing the Establishment
and Operation of Regular Demand Deposits which provide that "the Bank reserves the right to
close an account if the depositor frequently draws checks against insufficient funds and/or
uncollected deposits" and that "the Bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any reason."3
They showed that the respondent had improperly and irregularly handled his current account.
For example, in 1986, the respondents account was overdrawn 156 times, in 1987, 117 times
21
and in 1988, 26 times. In all these instances, the account was overdrawn due to the issuance of
checks against insufficient funds. The respondent had also signed several checks with a different
signature from the specimen on file for dubious reasons.
When the respondent made the deposit on April 5, 1988, it was obviously to cover for issuances
made the previous day against an insufficiently funded account. When his Check No. 2434886
was presented for payment on April 4, 1988, he had already incurred an overdraft; hence,
petitioner bank rightfully dishonored the same for insufficiency of funds.
After due proceedings, the court a quo rendered judgment in favor of the respondent as it
ordered the petitioner bank and Villadelgado, jointly and severally, to pay the respondent the
amounts of 100,000.00 as moral damages and 50,000.00 as exemplary damages and costs of
suit. In so ruling, the court a quo also cited petitioner banks rules and regulations which state
that "a charge of 10.00 shall be levied against the depositor for any check that is taken up as a
returned item due to insufficiency of funds on the date of receipt from the clearing office even
if said check is honored and/or covered by sufficient deposit the following banking day." The
same rules and regulations also provide that "a check returned for insufficiency of funds for any
reason of similar import may be subsequently recleared for one more time only, subject to the
same charges."
According to the court a quo, following these rules and regulations, the respondent, as
depositor, had the right to put up sufficient funds for a check that was taken as a returned item
for insufficient funds the day following the receipt of said check from the clearing office. In fact,
the said check could still be recleared for one more time. In previous instances, petitioner bank
notified the respondent when he incurred an overdraft and he would then deposit sufficient
funds the following day to cover the overdraft. Petitioner bank thus acted unjustifiably when it
immediately closed the respondents account on April 4, 1988 and deprived him of the
opportunity to reclear his check or deposit sufficient funds therefor the following day.
As a result of the closure of his current account, several of the respondents checks were
subsequently dishonored and because of this, the respondent was humiliated, embarrassed and
lost his credit standing in the business community. The court a quo further ratiocinated that
even granting arguendo that petitioner bank had the right to close the respondents account,
the manner which attended the closure constituted an abuse of the
said right. Citing Article 19 of the Civil Code of the Philippines which states that "[e]very person
must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith" and Article 20 thereof which states that
"[e]very person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same," the court a quo adjudged petitioner bank of acting in bad
faith. It held that, under the foregoing circumstances, the respondent is entitled to an award of
moral and exemplary damages.
The decretal portion of the court a quos decision reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. Ordering the defendants [petitioner bank and Villadelgado], jointly and severally, to pay
plaintiff [the respondent] the sum of 100,000.00 as moral damages;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum of 50,000.00 as
exemplary damages plus costs and expenses of the suit; and
3. Dismissing [the] defendants counterclaim for lack of merit.
SO ORDERED.4
On appeal, the CA rendered the Decision dated August 30, 2002, affirming with modification the
decision of the court a quo.
The appellate court substantially affirmed the factual findings of the court a quo as it held that
petitioner bank unjustifiably closed the respondents account notwithstanding that its own rules
and regulations allow that a check returned for insufficiency of funds or any reason of similar
import, may be subsequently recleared for one more time, subject to standard charges. Like the
court a quo, the appellate court observed that in several instances in previous years, petitioner
bank would inform the respondent when he incurred an overdraft and allowed him to make a
timely deposit to fund the checks that were initially dishonored for insufficiency of funds.
However, on April 4, 1988, petitioner bank immediately closed the respondents account
without even notifying him that he had incurred an overdraft. Even when they had already
closed his account on April 4, 1988, petitioner bank still accepted the deposit that the
respondent made on April 5, 1988, supposedly to cover his checks.
Echoing the reasoning of the court a quo, the CA declared that even as it may be conceded that
petitioner bank had reserved the right to close an account for repeated overdrafts by the
respondent, the exercise of that right must never be despotic or arbitrary. That petitioner bank
chose to close the account outright and return the check, even after accepting a deposit
sufficient to cover the said check, is contrary to its duty to handle the respondents account with
utmost fidelity. The exercise of the right is not absolute and good faith, at least, is required. The
manner by which petitioner bank closed the account of the respondent runs afoul of Article 19
of the Civil Code which enjoins every person, in the exercise of his rights, "to give every one his
due, and observe honesty and good faith."
22

The CA concluded that petitioner banks precipitate and imprudent closure of the respondents
account had caused him, a respected officer of several civic and banking associations, serious
anxiety and humiliation. It had, likewise, tainted his credit standing. Consequently, the award of
damages is warranted. The CA, however, reduced the amount of damages awarded by the court
a quo as it found the same to be excessive:
We, however, find excessive the amount of damages awarded by the RTC. In our view the
reduced amount of 75,000.00 as moral damages and 25,000.00 as exemplary damages are in
order. Awards for damages are not meant to enrich the plaintiff-appellee [the respondent] at
the expense of defendants-appellants [the petitioners], but to obviate the moral suffering he
has undergone. The award is aimed at the restoration, within limits possible, of the status quo
ante, and should be proportionate to the suffering inflicted.5
The dispositive portion of the assailed CA decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION
that the award of moral damages is reduced to 75,000.00 and the award of exemplary damages
reduced to 25,000.00.
SO ORDERED.6
Petitioner bank sought the reconsideration of the said decision but in the assailed Resolution
dated January 17, 2003, the appellate court denied its motion. Hence, the recourse to this Court.
Petitioner bank maintains that, in closing the account of the respondent in the evening of April
4, 1988, it acted in good faith and in accordance with the rules and regulations governing the
operation of a regular demand deposit which reserves to the bank "the right to close an account
if the depositor frequently draws checks against insufficient funds and/or uncollected deposits."
The same rules and regulations also provide that "the depositor is not entitled, as a matter of
right, to overdraw on this deposit and the bank reserves the right at any time to return checks
of the depositor which are drawn against insufficient funds or for any reason."
It cites the numerous instances that the respondent had overdrawn his account and those
instances where he deliberately signed checks using a signature different from the specimen on
file. Based on these facts, petitioner bank was constrained to close the respondents account for
improper and irregular handling and returned his Check No. 2434886 which was presented to
the bank for payment on April 4, 1988.
Petitioner bank further posits that there is no law or rule which gives the respondent a legal
right to make good his check or to deposit the corresponding amount to cover said check within
24 hours after the same is dishonored or returned by the bank for having been drawn against
insufficient funds. It vigorously denies having violated Article 19 of the Civil Code as it insists that
it acted in good faith and in accordance with the pertinent banking rules and regulations.
The petition is impressed with merit.
A perusal of the respective decisions of the court a quo and the appellate court show that the
award of damages in the respondents favor was anchored mainly on Article 19 of the Civil Code
which, quoted anew below, reads:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.
The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b)
which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another.7
Malice or bad faith is at the core of the said provision.8 The law always presumes good faith and
any person who seeks to be awarded damages due to acts of another has the burden of proving
that the latter acted in bad faith or with ill-motive.9 Good faith refers to the state of the mind
which is manifested by the acts of the individual concerned. It consists of the intention to abstain
from taking an unconscionable and unscrupulous advantage of another.10 Bad faith does not
simply connote bad judgment or simple negligence, dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill-
will that partakes of the nature of fraud.11 Malice connotes ill-will or spite and speaks not in
response to duty. It implies an intention to do ulterior and unjustifiable harm. Malice is bad faith
or bad motive.12
Undoubtedly, petitioner bank has the right to close the account of the respondent based on the
following provisions of its Rules and Regulations Governing the Establishment and Operation of
Regular Demand Deposits:
10) The Bank reserves the right to close an account if the depositor frequently draws checks
against insufficient funds and/or uncollected deposits.
12)
23
However, it is clearly understood that the depositor is not entitled, as a matter of right, to
overdraw on this deposit and the bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any other reason.
The facts, as found by the court a quo and the appellate court, do not establish that, in the
exercise of this right, petitioner bank committed an abuse thereof. Specifically, the second and
third elements for abuse of rights are not attendant in the present case. The evidence presented
by petitioner bank negates the existence of bad faith or malice on its part in closing the
respondents account on April 4, 1988 because on the said date the same was already
overdrawn. The respondent issued four checks, all due on April 4, 1988, amounting to 7,410.00
when the balance of his current account deposit was only 6,981.43. Thus, he incurred an
overdraft of 428.57 which resulted in the dishonor of his Check No. 2434886. Further,
petitioner bank showed that in 1986, the current account of the respondent was overdrawn 156
times due to his issuance of checks against insufficient funds.13 In 1987, the said account was
overdrawn 117 times for the same reason.14 Again, in 1988, 26 times.15 There were also several
instances when the respondent issued checks deliberately using a signature different from his
specimen signature on file with petitioner bank.16 All these circumstances taken together
justified the petitioner banks closure of the respondents account on April 4, 1988 for "improper
handling."
It is observed that nowhere under its rules and regulations is petitioner bank required to notify
the respondent, or any depositor for that matter, of the closure of the account for frequently
drawing checks against insufficient funds. No malice or bad faith could be imputed on petitioner
bank for so acting since the records bear out that the respondent had indeed been improperly
and irregularly handling his account not just a few times but hundreds of times. Under the
circumstances, petitioner bank could not be faulted for exercising its right in accordance with
the express rules and regulations governing the current accounts of its depositors. Upon the
opening of his account, the respondent had agreed to be bound by these terms and conditions.
Neither the fact that petitioner bank accepted the deposit made by the respondent the day
following the closure of his account constitutes bad faith or malice on the part of petitioner
bank. The same could be characterized as simple negligence by its personnel. Said act, by itself,
is not constitutive of bad faith.
The respondent had thus failed to discharge his burden of proving bad faith on the part of
petitioner bank or that it was motivated by ill-will or spite in closing his account on April 4, 1988
and in inadvertently accepting his deposit on April 5, 1988.
Further, it has not been shown that these acts were done by petitioner bank with the sole
intention of prejudicing and injuring the respondent. It is conceded that the respondent may
have suffered damages as a result of the closure of his current account. However, there is a
material distinction between damages and injury. The Court had the occasion to explain the
distinction between damages and injury in this wise:
Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from
the injury; and damages are the recompense or compensation awarded for the damage
suffered. Thus, there can be damage without injury in those instances in which the loss or harm
was not the result of a violation of a legal duty. In such cases, the consequences must be borne
by the injured person alone, the law affords no remedy for damages resulting from an act which
does not amount to a legal injury or wrong. These situations are often called damnum absque
injuria.
In other words, in order that a plaintiff may maintain an action for the injuries of which he
complains, he must establish that such injuries resulted from a breach of duty which the
defendant owed to the plaintiff a concurrence of injury to the plaintiff and legal responsibility
by the person causing it. The underlying basis for the award of tort damages is the premise that
the individual was injured in contemplation of law. Thus, there must first be a breach of some
duty and the imposition of liability for that breach before damages may be awarded; and the
breach of such duty should be the proximate cause of the injury.17
Whatever damages the respondent may have suffered as a consequence, e.g., dishonor of his
other insufficiently funded checks, would have to be borne by him alone. It was the respondents
repeated improper and irregular handling of his account which constrained petitioner bank to
close the same in accordance with the rules and regulations governing its depositors current
accounts. The respondents case is clearly one of damnum absque injuria.
WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2002 and Resolution
dated January 17, 2003 of the Court of Appeals in CA-G.R. CV No. 36627 are REVERSED AND SET
ASIDE.
SO ORDERED.
24
 G.R. No. 142411 October 14, 2005
WINIFREDA URSAL, Petitioner,
vs.
COURT OF APPEALS, THE RURAL BANK OF LARENA (SIQUIJOR), INC. and SPOUSES JESUS
MONESET and CRISTITA MONESET, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Decision1 of the Court of Appeals (CA) dated June 28, 1999 and the Resolution
dated January 31, 2000 denying petitioners motion for reconsideration.2
These are the facts:
The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333-square
meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu City covered by
Transfer Certificate of Title No. 78374.3 On January 9, 1985, they executed a "Contract to Sell
Lot & House" in favor of petitioner Winifreda Ursal (Ursal), with the following terms and
conditions:
That the VENDOR (Cristita R. Moneset) offers to SELL and the VENDEE accepts to BUY at the
agreed lump sum price of 130,000.00 payable on the installment basis as follows:
1. That on the date of the signing of this agreement, the VENDEE will tender an earnest money
or downpayment of 50,000.00 to the VENDOR, and by these presents, the latter hereby
acknowledges receipt of said amount from the former;
2. That the balance of the selling price of 80,000.00 shall be paid by the VENDEE to the VENDOR
in equal monthly installments of P3,000.00 starting the month of February, 1985, until said
balance of the selling price shall be fully paid;
3. That if the VENDEE shall fail or in default to pay six (6) monthly installments to the VENDOR
the herein agreement is deemed cancelled, terminated and/or rescinded and in such event, the
VENDEE (sic) binds to refund to the VENDOR (sic) the deposit of 50,000.00 and with the latters
(sic) obligation to pay the former (sic) as a corresponding refund for cost of improvements made
in the premises by VENDEE;
4. That on the date of receipt of the downpayment of 50,000.00 by the VENDOR, it is mutually
agreed for VENDEE to occupy and take physical possession of the premises as well as for the
latter (VENDEE) to keep and hold in possession the corresponding transfer certificate of title No.
______ of the land in question which is the subject of this agreement;
5. That on the date of final payment by the VENDEE to the VENDOR, the latter shall execute at
her expense the corresponding document of DEED OF ABSOLUTE SALE for the former as well as
the payment of realty clearances, BIR Capital Gain Tax, sales tax or transfer fees and attorneys
fees; that, for the issuance of title in VENDEEs name shall be the exclusive account of said
VENDEE.4
Petitioner paid the down payment and took possession of the property. She immediately built
a concrete perimeter fence and an artesian well, and planted fruit bearing trees and flowering
plants thereon which all amounted to 50,000.00. After paying six monthly installments,
petitioner stopped paying due to the Monesets failure to deliver to her the transfer certificate
of title of the property as per their agreement; and because of the failure of the Monesets to
turn over said title, petitioner failed to have the contract of sale annotated thereon.5
Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of sale
in favor of Dr. Rafael Canora, Jr. over the said property for 14,000.00.6 On September 15, 1986,
the Monesets executed another sale, this time with pacto de retro with Restituto Bundalo.7 On
the same day, Bundalo, as attorney-in-fact of the Monesets, executed a real estate mortgage
over said property with Rural Bank of Larena (hereafter Bank) located in Siquijor for the amount
of 100,000.00.8 The special power of attorney made by the Monesets in favor of Bundalo as
well as the real estate mortgage was then annotated on the title on September 16, 1986.9 For
the failure of the Monesets to pay the loan, the Bank served a notice of extrajudicial foreclosure
dated January 27, 1988 on Bundalo.10
On September 30, 1989, Ursal filed an action for declaration of non-effectivity of mortgage and
damages against the Monesets, Bundalo and the Bank. She claimed that the defendants
committed fraud and/or bad faith in mortgaging the property she earlier bought from the
Monesets with a bank located in another island, Siquijor; and the Bank acted in bad faith since
it granted the real estate mortgage in spite of its knowledge that the property was in the
possession of petitioner.11
The Monesets answered that it was Ursal who stopped paying the agreed monthly installments
in breach of their agreement.12 The Bank, on the other hand, averred that the title of the
25
property was in the name of "Cristita Radaza Moneset married to Jesus Moneset" and did not
show any legal infirmity.13
Bundalo, meanwhile, was not served summons because he could no longer be found at his given
address.14
Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch 24,
rendered its decision finding that Ursal is more credible than the Monesets and that the
Monesets are liable for damages for fraud and breach of the contract to sell:
The evidence of [Ursal] show that she was the first to acquire a substantial interest over the lot
and house by virtue of the execution of the Contract to Sell (Exh. "A"). After the execution of
Exh. "A" plaintiff took possession of the questioned lot and houseafter she made a
downpayment of 50,000.00. [S]he paid the installments for six (6) months without fail.
[However] plaintiff (stopped) paying the installment because defendant spouses failed to give
her the Transfer Certificate of Title over the lot and house despite repeated demands. It is
evident then that the first to violate the conditions of Exh. "A" were the defendants Spouses
Moneset. This is the reason why plaintiff was not able to annotate Exh. "A" on the TCT. The
evidence of plaintiff show that there was no intention on her part to discontinue paying the
installments. In a reciprocal obligation, one cannot be compelled to do if the other party fails to
do his part (Art. 1169, New Civil Code).
The acts of defendant Spouses Moneset in selling again the lot and house in question to Dr.
Canora by executing a Deed of Absolute Sale; in selling the same on pacto de retro to defendant
Bundalo; and in mortgaging the same to defendant Rural Bank of Larena are plainly and clearly
fraudulent because they were done while Exh. "A" was still existing and the transaction was
done without notice to the plaintiff. As provided in Art. 1170 of the New Civil Code, those who
are guilty of fraud in the performance of their obligation --- and those who in any manner
contravene the tenor thereof, are liable for damages.
Another ground for liability under this article is when there is fraud/deceit. In the instant case,
there was fraud/deceit on the part of the defendant spouses Moneset when they executed the
Deed of Sale to Dr. Canora; the Deed of Sale with Pacto de Retro to Bundalo and the Special
Power of Attorney for Bundalo to execute for and in their behalf the Real Estate Mortgage with
the Rural Bank of Larena knowing fully well that the Contract to Sell house and lot, Exh. "A" was
still existing notwithstanding their violation to the provisions thereto. It is therefore crystal clear
that defendant spouses Moneset are liable for damages.15
As to the real estate mortgage, the trial court held that the same was valid and the Bank was
not under any obligation to look beyond the title, although the present controversy could have
been avoided had the Bank been more astute in ascertaining the nature of petitioners
possession of the property, thus:
The Real Estate Mortgage and the Foreclosure Proceedings cannot be considered null and void
in the sense that per se the formalities required by law were complied with except for the fact
that behind their execution there was fraud, deceit and bad faith on the part of defendant
spouses Moneset and Bundalo.
The defendant Rural Bank of Larena for its part could have avoided this situation if the bank
appraiser who made the ocular inspection of the subject house and lot went deeper and
investigated further when he learned that the owner is not the actual occupant. He was however
told by Moneset that the actual occupant was only a lessee. Banking on this information that
the actual occupant was only a lessee with no other right over and above such, the bank
approved a loan of 100,000.00 in favor of Moneset through Bundalo their attorney-in-fact.
Likewise the Rural Bank of Larena had the right to rely on what appeared on the certificate of
title of the Monesets and it was under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on the face of the certificate.
The approval of the 100,000.00 loan from the Rural Bank of Larena was made possible through
the deception and bad faith of defendant spouses Moneset and Bundalo but the pertinent
documents were per se in order. The court is of the honest belief that the case against the
defendant bank be dismissed for lack of merit. The court however believes that for reasons of
equity the bank should give the plaintiff Ursal the preferential right to redeem the subject house
and lot.16
The trial court then disposed of the case as follows:
Wherefore premises considered, judgment is hereby rendered in favor of the defendant Rural
Bank of Larena dismissing the complaint against it for lack of merit and against the defendant
spouses Moneset ordering them to:
1. reimburse to plaintiff Ursal the following:
26
 Hence, the present petition raising the sole error:
a.) downpayment of 50,000.00
"That with grave abuse of discretion amounting to excess of jurisdiction, the Honorable Court
b.) monthly installments for six months at 3,000.00 per month --- 18,000.00 of Appeals erred in rendering a decision and Resolution NOT in accordance with law and the
applicable rulings of the Supreme Court."22
c.) expenses improvements 61, 676.52
Petitioner claims that: the Bank was duly informed through its appraiser that the house and lot
2. pay to plaintiff the following: to be mortgaged by Monesets were in the possession of a lessee; the Bank should have taken
this as a cue to investigate further the Monesets right over the same; the case of Embrado vs.
a.) moral damages ----------------- 30,000.00 Court of Appeals (233 SCRA 335) held that where a purchaser neglects to make the necessary
inquiry and closes his eyes to facts which should put a reasonable man on his guard to the
b.) exemplary damages ----------- 20,000.00 possibility of the existence of a defect in his vendors title, he cannot claim that he is a purchaser
in good faith; Sec. 50 of Act 496 provides that where a party has knowledge of a prior existing
c.) litigation expenses------------- 5,000.00 interest which is unregistered at the time he acquired the land, his knowledge of that prior
unregistered interest has the effect of registration as to him and the Torrens system cannot be
d.) attorneys fees ----------------- 10,000.00 used as a shield against fraud; following Art. 2176 of the Civil Code, respondent Bank is obliged
to pay for the damage done.23
e.) costs
Petitioner then prayed that the Deed of Real Estate Mortgage be declared as non-effective and
3. order the defendant Rural Bank of Larena to give the plaintiff the preferential right to redeem non-enforceable as far as petitioner is concerned; that she be declared as the absolute owner
the subject house and lot. of the house and lot in question; that the Monesets be ordered to execute a deed of absolute
sale covering the subject property; and that the Bank be ordered to direct the collection or
SO ORDERED.17 payment of the loan of 100,000.00 plus interest from the Monesets for they were the ones
who received and enjoyed the said loan.24
Both Ursal and the Monesets appealed the decision to the CA. Ursal alleged that the Bank was
guilty of bad faith for not investigating the On the other hand, respondent Bank in its Comment argues that: its interest in the property was
only that of mortgagee and not a purchaser thus its interest is limited only to ascertaining that
presence of Ursal on the property in question, while the Monesets claimed that the trial court the mortgagor is the registered owner; the case cited is inapplicable at bar since it involves the
erred in giving preferential right to Ursal to redeem the property and in ordering them to pay purchase of real property; Ursal was purportedly only a lessee of the property, thus as
damages.18 mortgagor who is not entitled to possess the mortgaged property, they no longer considered
the lease in the processing and approval of the loan; Sec. 50 of Act No. 496 is also inapplicable
The CA affirmed in toto the decision of the trial court. It held that the Bank did not have prior since the alleged prior existing interest was only that of a lessee; in any case, it was the Monesets
knowledge of the contract to sell the house and lot and the Monesets acted fraudulently thus who lied to the Bank anent the real nature of the encumbrance, thus, it is the Monesets who
they cannot be given preferential right to redeem the property and were therefore correctly are guilty of fraud and not the Bank.25
ordered to pay damages.19
In her "Rejoinder,"26 petitioner argued that: under the law on mortgage, the mortgagor must
The Monesets filed a motion for reconsideration which was denied outright for having been filed be the owner of the property he offers as security of his loan; the mortgagee like herein Bank
out of time.20 Ursals motion for reconsideration was denied by the CA on January 31, 2000 for which neglects to verify the ownership of the property offered as security of the loan runs the
lack of merit.21 risk of his folly; the Banks negligence is not excusable because an adverse claim and notice of
lis pendens were already annotated on the certificate of title when the mortgage was

27
constituted or when the deed of real estate mortgage was annotated; it would be unfair to put
the blame on petitioner who was innocent of the transaction; the trial court found that the Bank
even provided its appraiser the amount of 15,000.00 to redeem the pacto de retro sale
allegedly executed in favor of Dr. Canora; this should have aroused the Banks suspicion and
prompted it to investigate further the property; the trial court recognized the bad faith
committed by the Monesets and ordered them to pay the sum of 126,676.52 in damages but
exonerated the Bank who is equally guilty of bad faith; the Monesets cannot pay the damages
as they have no money and property thus if the decision of the trial court as affirmed by the CA
is to be enforced, they will only be holding an empty bag while the Bank which is equally guilty
will go free; what would be fair is to let the
two respondents bear jointly and severally the consequences of their transaction and let the
innocent petitioner ultimately own the house and lot in question.27
The petitioner, in her Memorandum dated July 31, 2005, raised the issues of: "(1) Whether or
not the document captioned: Contract to Sell Lot and House (Exh. A) is valid and binding so
much so that the herein Petitioner who is the Vendee is the lawful and true owner of the lot and
house in question; (2) Whether or not the herein respondents spouses Jesus Moneset and
Cristita Moneset who were the vendors and/or mortgagors together with respondent Restituto
Bundalo were conniving and acting in bad faith; and (3) Whether or not respondent Rural Bank
of Larena measured up to the strict requirement of making a thorough investigation of the
property offered as collateral before granting a loan and be considered as innocent mortgagee
and entitled to the protection of the law."28 Petitioner reiterated her arguments in support of
the first and third issues raised in the Memorandum while she merely adopted the CA findings
in support of the second issue, i.e., when the Monesets encumbered the Transfer Certificate of
Title (TCT) to Dr. Canora and thereafter to Bundalo, they committed bad faith or fraud since the
contract to sell with Ursal was still valid and subsisting.29
Respondent Bank, in its Memorandum dated July 20, 2005, reiterated the arguments it made in
its Comment that: the case cited by petitioner requiring extra ordinary diligence is inapplicable
in this case since what is involved here is mortgage and not sale; as mortgagee, its interest is
limited only to determining whether the mortgagor is the registered owner of the property
whose certificate of title showed that there were no existing encumbrances thereon; and even
with unregistered encumbrances, the Bank has priority by the registration of the loan
documents.30
No memorandum is filed by respondent Monesets.
The crux of petitioners contention is that the Bank failed to look beyond the transfer certificate
of title of the property for which it must be held liable.
We agree. Banks cannot merely rely on certificates of title in ascertaining the status of
mortgaged properties; as their business is impressed with public interest, they are expected to
exercise more care and prudence in their dealings than private individuals.31 Indeed, the rule
that persons dealing with registered lands can rely solely on the certificate of title does not apply
to banks.32
As enunciated in Cruz vs. Bancom:33
Respondent is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private
individuals, it is expected to exercise greater care and prudence in its dealings, including those
involving registered lands. A banking institution is expected to exercise due diligence before
entering into a mortgage contract. The ascertainment of the status or condition of a property
offered to it as security for a loan must be a standard and indispensable part of its operations.34
Our agreement with petitioner on this point of law, notwithstanding, we are constrained to
refrain from granting the prayers of her petition, to wit: that the Deed of Real Estate Mortgage
be declared as non-effective and non-enforceable as far as petitioner is concerned; that she be
declared as the absolute owner of the house and lot in question; that the Monesets be ordered
to execute a deed of absolute sale covering the subject property; and that the Bank be ordered
to direct the collection or payment of the loan of 100,000.00 plus interest from the Monesets
for they were the ones who received and enjoyed the said loan.35
The reason is that, the contract between petitioner and the Monesets being one of "Contract to
Sell Lot and House," petitioner, under the circumstances, never acquired ownership over the
property and her rights were limited to demand for specific performance from the Monesets,
which at this juncture however is no longer feasible as the property had already been sold to
other persons.
A contract to sell is a bilateral contract whereby the prospective seller, while expressly reserving
the ownership of the subject property despite delivery thereof to the prospective buyer, binds
himself to sell the said property exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, that is, full payment of the purchase price.36
In such contract, the prospective seller expressly reserves the transfer of title to the prospective
buyer, until the happening of an event, which in this case is the full payment of the purchase
price. What the seller agrees or obligates himself to do is to fulfill his promise to sell the subject
property when the entire amount of the purchase price is delivered to him. Stated differently,
the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment
28
of which prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer.37
It is different from contracts of sale, since ownership in contracts to sell is reserved by the vendor
and is not to pass to the vendee until full payment of the purchase price, while in contracts of
sale, title to the property passess to the vendee upon the delivery of the thing sold. In contracts
of sale the vendor loses ownership over the property and cannot recover it unless and until the
contract is resolved or rescinded, while in contracts to sell, title is retained by the vendor until
full payment of the price.38 In contracts to sell, full payment is a positive suspensive condition
while in contracts of sale, non-payment is a negative resolutory condition.39
A contract to sell may further be distinguished from a conditional contract of sale, in that, the
fulfillment of the suspensive condition, which is the full payment of the purchase price, will not
automatically transfer ownership to the buyer although the property may have been previously
delivered to him. The prospective vendor still has to convey title to the
prospective buyer by entering into a contract of absolute sale. While in a conditional contract of
sale, the fulfillment of the suspensive condition renders the sale absolute and affects the sellers
title thereto such that if there was previous delivery of the property, the sellers ownership or
title to the property is automatically transferred to the buyer. 40
Indeed, in contracts to sell the obligation of the seller to sell becomes demandable only upon
the happening of the suspensive condition, that is, the full payment of the purchase price by the
buyer. It is only upon the existence of the contract of sale that the seller becomes obligated to
transfer the ownership of the thing sold to the buyer. Prior to the existence of the contract of
sale, the seller is not obligated to transfer the ownership to the buyer, even if there is a contract
to sell between them. 41
In this case, the parties not only titled their contract as "Contract to Sell Lot and House" but
specified in their agreement that the vendor shall only execute a deed of absolute sale on the
date of the final payment by vendee.42 Such provision signifies that the parties truly intended
their contract to be that of contract to sell.43
Since the contract in this case is a contract to sell, the ownership of the property remained with
the Monesets even after petitioner has paid the down payment and took possession of the
property. In Flancia vs. Court of Appeals,44 where the vendee in the contract to sell also took
possession of the property, this Court held that the subsequent mortgage constituted by the
owner over said property in favor of another person was valid since the vendee retained
absolute ownership over the property.45 At most, the vendee in the contract to sell was entitled
only to damages.46
Petitioner attributes her decision to stop paying installments to the failure of the Monesets to
comply with their agreement to deliver the transfer certificate of title after the down payment
of 50,000.00. On this point, the trial court was correct in holding that for such failure, the
Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on reciprocal
obligations.47
The vendors breach of the contract, notwithstanding, ownership still remained with the
Monesets and petitioner cannot justify her failure to complete the payment.
In Pangilinan vs. Court of Appeals,48 the vendees contended that their failure to pay the balance
of the total contract price was because the vendor reneged on its obligation to improve the
subdivision and its facilities. In said case, the Court held that the vendees were barred by laches
from asking for specific performance eight years from the date of last installment. The Court
held that:
(the vendees) instead of being vigilant and diligent in asserting their rights over the subject
property had failed to assert their rights when the law requires them to act. Laches or "stale
demands" is based upon grounds of public policy which requires, for the peace of society, the
discouragement of stale claims and unlike the statute of limitations, is not a mere question of
time but is principally a question of the inequity or unfairness of permitting a right or claim to
be enforced or asserted.
The legal adage finds application in the case at bar. Tempus enim modus tollendi obligations et
actiones, quia tempus currit contra desides et sui juris contemptoresFor time is a means of
dissipating obligations and actions, because time runs against the slothful and careless of their
own rights."49
In this case, petitioner instituted an action for "Declaration of Non-Effectivity of Mortgage with
Damages" four years from the date of her last installment and only as a reaction to the
foreclosure proceedings instituted by respondent Bank. After the Monesets failed to deliver the
TCT, petitioner merely stopped paying installments and did not institute an action for specific
performance, neither did she consign payment of the remaining balance as proof of her
willingness and readiness to comply with her part of the obligation. As we held in San Lorenzo
Development Corp. vs. Court of Appeals,50 the perfected contract to sell imposed on the vendee
the obligation to pay the balance of the purchase price. There being an obligation to pay the
price, the vendee should have made the proper tender of payment and consignation of the price
in court as required by law. Consignation of the amounts due in court is essential in order to
extinguish the vendees obligation to pay the balance of the purchase price.51 Since there is no
indication in the records that petitioner even attempted to make the proper consignation of the
29
amounts due, the obligation on the part of the Monesets to transfer ownership never acquired
obligatory force.
In other words, petitioner did not acquire ownership over the subject property as she did not
pay in full the equal price of the contract to sell. Further, the Monesets breach did not entitle
petitioner to any preferential treatment over the property especially when such property has
been sold to other persons.
to be declared the owner of the property, this late, especially since the same has already passed
hands several times, neither can she question the mortgage constituted on the property years
after title has already passed to another person by virtue of a deed of absolute sale.
At this point, let it be stated that the courts below and even this Court have no jurisdiction to
resolve the issue whether there was bad faith among the Monesets, Canora and Bundalo.
Canora was never impleaded. Bundalo has not been served with summons.

As explained in Coronel vs. Court of Appeals:52 WHEREFORE, the petition is DENIED. The decision of the Regional Trial Court of Cebu City,
Branch 24, promulgated on February 5, 1993 and the decision of the Court of Appeals dated
In a contract to sell, there being no previous sale of the property, a third person buying such June 28, 1999 are hereby AFFIRMED. However, in the higher interest of substantial justice, the
property despite the fulfillment of the suspensive condition such as the full payment of the Court MODIFIES the same to the effect that the portion ordering the Rural Bank of Larena
purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer (Siquijor), Inc. to give petitioner the preferential right to redeem the house and lot covered by
cannot seek the relief of reconveyance of the property. There is no double sale in such case. Transfer Certificate of Title No. 78374 is DELETED for lack of legal basis.
Title to the property will transfer to the buyer after registration because there is no defect in
the owner-sellers title per se, but the latter, of course, may be sued for damages by the No costs.
intending buyer.53 (Emphasis supplied)
SO ORDERED.
In this case, the lower courts found that the property was sold to Dr. Canora and then to Bundalo
who in turn acted as attorney-in-fact for the Monesets in mortgaging the property to
respondent Bank. The trial court and the CA erred in giving petitioner the preferential right to
redeem the property as such would prejudice the rights of the subsequent buyers who were not
parties in the proceedings below. While the matter of giving petitioner preferential right to
redeem the property was not put in issue before us, in the exercise of our discretionary power
to correct manifest and palpable error, we deem it proper to delete said portion of the decision
for being erroneous.54

Petitioners rights were limited to asking for specific performance and damages from the
Monesets. Specific performance, however, is no longer feasible at this point as explained above.
This being the case, it follows that petitioner never had any cause of action against respondent
Bank. Having no cause of action against the bank and not being an owner of the subject
property, petitioner is not entitled to redeem the subject property.

Petitioner had lost her right to demand specific performance when the Monesets executed a
Deed of Absolute Sale in favor of Dr. Canora. Contrary to what she claims, petitioner had no
vested right over the property.

Indeed, it is the Monesets who first breached their obligation towards petitioner and are guilty
of fraud against her. It cannot be denied however that petitioner is also not without fault. She
sat on her rights and never consigned the full amount of the property. She therefore cannot ask

30
 G.R. No. L-20583 January 23, 1967
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO
TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO,
RICARDO D. BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
Office of the Solicitor General Arturo A. Alafriz and Solicitor E. M. Salva for petitioner.
Sycip, Salazar, Luna, Manalo & Feliciano for respondents.
Natalio M. Balboa and F. E. Evangelista for the receiver.
CONCEPCION, C.J.:
This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the
Security and Acceptance Corporation for allegedly engaging in banking operations without the
authority required therefor by the General Banking Act (Republic Act No. 337). Named as
respondents in the petition are, in addition to said corporation, the following, as alleged
members of its Board of Directors and/or Executive Officers, namely:
16, 1962; that, prior thereto, or on March 9, 1961, the corporation had applied with the
Securities and Exchange Commission for the registration and licensing of its securities under the
Securities Act; that, before acting on this application, the Commission referred it to the Central
Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in line with which,
the Commission advised the corporation on December 5, 1961, to comply with the requirements
of the General Banking Act; that, upon application of members of the Manila Police Department
and an agent of the Central Bank, on May 18, 1962, the Municipal Court of Manila issued Search
Warrant No. A-1019; that, pursuant thereto, members of the intelligence division of the Central
Bank and of the Manila Police Department searched the premises of the corporation and seized
documents and records thereof relative to its business operations; that, upon the return of said
warrant, the seized documents and records were, with the authority of the court, placed under
the custody of the Central Bank of the Philippines; that, upon examination and evaluation of
said documents and records, the intelligence division of the Central Bank submitted, to the
Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding that the
corporation is:
1. Performing banking functions, without requisite certificate of authority from the Monetary
Board of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in that it is soliciting
and accepting deposit from the public and lending out the funds so received;

NAME POSITION 2. Soliciting and accepting savings deposits from the general public when the company's articles
Rosendo T. Resuello President & Chairman of the Board of incorporation authorize it only to engage primarily in financing agricultural, commercial and
Pablo Tanjutco Director industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation,
Arturo Soriano Director thereby exceeding the scope of its powers and authority as granted under its charter;
Ruben Beltran Director consequently such acts are ultra-vires:
Bienvenido V. Zapa Director & Vice-President
Pilar G. Resuello Director & Secretary-Treasurer 3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on account
Ricardo D. Balatbat Director & Auditor thereof, without prior registration and/or licensing of such shares or securing exemption
Jose R. Sebastian Director & Legal Counsel therefor, in violation of the Securities Act; and
Vito Tanjutco Jr. Director & Personnel Manager
The record shows that the Articles of Incorporation of defendant corporation1 were registered 4. That being a private credit and financial institution, it should come under the supervision of
with the Securities and Exchange Commission on March 27, 1961; that the next day, the Board the Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, duties
of Directors of the corporation adopted a set of by-laws,2 which were filed with said Commission and functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of
on April 5, 1961; that on September 19, 1961, the Superintendent of Banks of the Central Bank Banking, to the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88 and
of the Philippines asked its legal counsel an opinion on whether or not said corporation is a 89 of Republic Act 337." (Emphasis Supplied.) that upon examination and evaluation of the same
banking institution, within the purview of Republic Act No. 337; that, acting upon this request, records of the corporation, as well as of other documents and pertinent pipers obtained
on October 11, 1961, said legal counsel rendered an opinion resolving the query in the elsewhere, the Superintendent of Banks, submitted to the Monetary Board of the Central Bank
affirmative; that in a letter, dated January 15, 1962, addressed to said Superintendent of Banks, a memorandum dated August 28, 1962, stating inter alia.
the corporation through its president, Rosendo T. Resuello, one of defendants herein, sought a
reconsideration of the aforementioned opinion, which reconsideration was denied on March

31
11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in his
Memorandum to the Governor dated May 23, 1962 and in accordance with the written
instructions of Governor Castillo dated May 31, 1962, an examination of the books and records
of the Security Credit and Loans Organizations, Inc. seized by the combined MPD-CB team was
conducted by this Department. The examination disclosed the following findings:
a. Considering the extent of its operations, the Security Credit and Acceptance Corporation, Inc.,
receives deposits from the public regularly. Such deposits are treated in the Corporation's
financial statements as conditional subscription to capital stock. Accumulated deposits of
P5,000 of an individual depositor may be converted into stock subscription to the capital stock
of the Security Credit and Acceptance Corporation at the option of the depositor. Sale of its
shares of stock or subscriptions to its capital stock are offered to the public as part of its regular
operations.
b. That out of the funds obtained from the public through the receipt of deposits and/or the sale
of securities, loans are made regularly to any person by the Security Credit and Acceptance
Corporation.
A copy of the Memorandum Report dated July 30, 1962 of the examination made by Examiners
of this Department of the seized books and records of the Corporation is attached hereto.
12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, defines the
term, "banking institution" as follows:
Sec. 2. Only duly authorized persons and entities may engage in the lending of funds obtained
from the public through the receipts of deposits or the sale of bonds, securities, or obligations
of any kind and all entities regularly conducting operations shall be considered as banking
institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of
other pertinent laws. ...
13. Premises considered, the examination disclosed that the Security Credit and Acceptance
Corporation is regularly lending funds obtained from the receipt of deposits and/or the sale of
securities. The Corporation therefore is performing 'banking functions' as contemplated in
Republic Act No. 337, without having first complied with the provisions of said Act.
Recommendations:
In view of all the foregoing, it is recommended that the Monetary Board decide and declare:
1. That the Security Credit and Acceptance Corporation is performing banking functions without
having first complied with the provisions of Republic Act No. 337, otherwise known as the
General Banking Act, in violation of Sections 2 and 6 thereof; and
2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) for
whatever legal actions are warranted, including, if warranted criminal action against the Persons
criminally liable and/or quo warranto proceedings with preliminary injunction against the
Corporation for its dissolution. (Emphasis supplied.)
that, acting upon said memorandum of the Superintendent of Banks, on September 14, 1962,
the Monetary Board promulgated its Resolution No. 1095, declaring that the corporation is
performing banking operations, without having first complied with the provisions of Sections 2
and 6 of Republic Act No. 337;3 that on September 25, 1962, the corporation was advised of the
aforementioned resolution, but, this notwithstanding, the corporation, as well as the members
of its Board of Directors and the officers of the corporation, have been and still are performing
the functions and activities which had been declared to constitute illegal banking operations;
that during the period from March 27, 1961 to May 18, 1962, the corporation had established
74 branches in principal cities and towns throughout the Philippines; that through a systematic
and vigorous campaign undertaken by the corporation, the same had managed to induce the
public to open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74;
that, in consequence of the foregoing deposits with the corporation, its original capital stock of
P500,000, divided into 20,000 founders' shares of stock and 80,000 preferred shares of stock,
both of which had a par value of P5.00 each, was increased, in less than one (1) year, to
P3,000,000 divided into 130,000 founders' shares and 470,000 preferred shares, both with a par
value of P5.00 each; and that, according to its statement of assets and liabilities, as of December
31, 1961, the corporation had a capital stock aggregating P1,273,265.98 and suffered, during
the year 1961, a loss of P96,685.29. Accordingly, on December 6, 1962, the Solicitor General
commenced this quo warranto proceedings for the dissolution of the corporation, with a prayer
that, meanwhile, a writ of preliminary injunction be issued ex parte, enjoining the corporation
and its branches, as well as its officers and agents, from performing the banking operations
complained of, and that a receiver be appointed pendente lite.
Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of the
Central Bank of the Philippines was appointed by this Court receiver pendente lite of defendant
corporation, and upon the filing of the requisite bond, said officer assumed his functions as such
receiver on September 16, 1963.
In their answer, defendants admitted practically all of the allegations of fact made in the
petition. They, however, denied that defendants Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran,
Zapa, Balatbat and Sebastian, are directors of the corporation, as well as the validity of the
32
opinion, ruling, evaluation and conclusions, rendered, made and/or reached by the legal counsel
and the intelligence division of the Central Bank, the Securities and Exchange Commission, and
the Superintendent of Banks of the Philippines, or in Resolution No. 1095 of the Monetary
Board, or of Search Warrant No. A-1019 of the Municipal Court of Manila, and of the search and
seizure made thereunder. By way of affirmative allegations, defendants averred that, as of July
7, 1961, the Board of Directors of the corporation was composed of defendants Rosendo T.
Resuello, Aquilino L. Illera and Pilar G. Resuello; that on July 11, 1962, the corporation had filed
with the Superintendent of Banks an application for conversion into a Security Savings and
Mortgage Bank, with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran
and Sebastian as proposed directors, in addition to the defendants first named above, with
defendants Rosendo T. Resullo, Zapa, Pilar G. Resuello, Balatbat and Sebastian as proposed
president, vice-president, secretary-treasurer, auditor and legal counsel, respectively; that said
additional officers had never assumed their respective offices because of the pendency of the
approval of said application for conversion; that defendants Soriano, Beltran, Sebastian, Vito
Tanjutco Jr. and Pablo Tanjutco had subsequently withdrawn from the proposed mortgage and
savings bank; that on November 29, 1962 or before the commencement of the present
proceedings the corporation and defendants Rosendo T. Resuello and Pilar G. Resuello had
instituted Civil Case No. 52342 of the Court of First Instance of Manila against Purificacion Santos
and other members of the savings plan of the corporation and the City Fiscal for a declaratory
relief and an injunction; that on December 3, 1962, Judge Gaudencio Cloribel of said court issued
a writ directing the defendants in said case No. 52342 and their representatives or agents to
refrain from prosecuting the plaintiff spouses and other officers of the corporation by reason of
or in connection with the acceptance by the same of deposits under its savings plan; that acting
upon a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the Court of First
Instance of Manila had appointed Jose Ma. Ramirez as receiver of the corporation; that, on
December 12, 1962, said Ramirez qualified as such receiver, after filing the requisite bond; that,
except as to one of the defendants in said case No. 52342, the issues therein have already been
joined; that the failure of the corporation to honor the demands for withdrawal of its depositors
or members of its savings plan and its former employees was due, not to mismanagement or
misappropriation of corporate funds, but to an abnormal situation created by the mass demand
for withdrawal of deposits, by the attachment of property of the corporation by its creditors, by
the suspension by debtors of the corporation of the payment of their debts thereto and by an
order of the Securities and Exchange Commission dated September 26, 1962, to the corporation
to stop soliciting and receiving deposits; and that the withdrawal of deposits of members of the
savings plan of the corporation was understood to be subject, as to time and amounts, to the
financial condition of the corporation as an investment firm.
In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the anniversary
publication of defendant corporation showed that defendants Pablo Tanjutco, Arturo Soriano,
Ruben Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr.
are officers and/or directors thereof; that this is confirmed by the minutes of a meeting of
stockholders of the corporation, held on September 27, 1962, showing that said defendants had
been elected officers thereof; that the views of the legal counsel of the Central Bank, of the
Securities and Exchange Commission, the Intelligence Division, the Superintendent of Banks and
the Monetary Board above referred to have been expressed in the lawful performance of their
respective duties and have not been assailed or impugned in accordance with law; that neither
has the validity of Search Warrant No. A-1019 been contested as provided by law; that the only
assets of the corporation now consist of accounts receivable amounting approximately to
P500,000, and its office equipment and appliances, despite its increased capitalization of
P3,000,000 and its deposits amounting to not less than P1,689,136.74; and that the
aforementioned petition of the corporation, in Civil Case No. 52342 of the Court of First Instance
of Manila, for a declaratory relief is now highly improper, the defendants having already
committed infractions and violations of the law justifying the dissolution of the corporation.
Although, admittedly, defendant corporation has not secured the requisite authority to engage
in banking, defendants deny that its transactions partake of the nature of banking operations.
It is conceded, however, that, in consequence of a propaganda campaign therefor, a total of
59,463 savings account deposits have been made by the public with the corporation and its 74
branches, with an aggregate deposit of P1,689,136.74, which has been lent out to such persons
as the corporation deemed suitable therefor. It is clear that these transactions partake of the
nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank
has been defined as:
... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitate the
borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct.
243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State
vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p.
46).
Moreover, it has been held that:
An investment company which loans out the money of its customers, collects the interest and
charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co.
vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.)
... any person engaged in the business carried on by banks of deposit, of discount, or of
circulation is doing a banking business, although but one of these functions is exercised.
(MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.)
33
Accordingly, defendant corporation has violated the law by engaging in banking without
securing the administrative authority required in Republic Act No. 337.
That the illegal transactions thus undertaken by defendant corporation warrant its dissolution
is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects
the essence of its business, that it is willful and has been repeated 59,463 times, and that its
continuance inflicts injury upon the public, owing to the number of persons affected thereby.
It is urged, however, that this case should be remanded to the Court of First Instance of Manila
upon the authority of Veraguth vs. Isabela Sugar Co. (57 Phil. 266). In this connection, it should
be noted that this Court is vested with original jurisdiction, concurrently with courts of first
instance, to hear and decide quo warranto cases and, that, consequently, it is discretionary for
us to entertain the present case or to require that the issues therein be taken up in said Civil
Case No. 52342. The Veraguth case cited by herein defendants, in support of the second
alternative, is not in point, because in said case there were issues of fact which required the
presentation of evidence, and courts of first instance are, in general, better equipped than
appellate courts for the taking of testimony and the determination of questions of fact. In the
case at bar, there is, however, no dispute as to the principal facts or acts performed by the
corporation in the conduct of its business. The main issue here is one of law, namely, the legal
nature of said facts or of the aforementioned acts of the corporation. For this reason, and
because public interest demands an early disposition of the case, we have deemed it best to
determine the merits thereof.
Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is,
accordingly, ordered dissolved. The appointment of receiver herein issued pendente lite is
hereby made permanent, and the receiver is, accordingly, directed to administer the properties,
deposits, and other assets of defendant corporation and wind up the affairs thereof
conformably to Rules 59 and 66 of the Rules of Court. It is so ordered.
G.R. No. L-20119 June 30, 1967
CENTRAL BANK OF THE PHILIPPINES, petitioner,
vs.
THE HONORABLE JUDGE JESUS P. MORFE and FIRST MUTUAL SAVING AND LOAN
ORGANIZATION, INC., respondents.
Natalio M. Balboa, F. E. Evangelista and Mariano Abaya for petitioner.
Halili, Bolinao, Bolinao and Associates for respondents.
CONCEPCION, C.J.:
This is an original action for certiorari, prohibition and injunction, with preliminary injunction,
against an order of the Court of First Instance of Manila, the dispositive part of which reads:
WHEREFORE, upon the petitioner filing an injunction bond in the amount of P3,000.00, let a writ
of preliminary preventive and/or mandatory injunction issue, restraining the respondents, their
agents or representatives, from further searching the premises and properties and from taking
custody of the various documents and papers of the petitioner corporation, whether in its main
office or in any of its branches; and ordering the respondent Central Bank and/or its co-
respondents to return to the petitioner within five (5) days from service on respondents of the
writ of preventive and/or mandatory injunction, all the books, documents, and papers so far
seized from the petitioner pursuant to the aforesaid search warrant.1wph1.t
Upon the filing of the petition herein and of the requisite bond, we issued, on August 14, 1962,
a writ of preliminary injunction restraining and prohibiting respondents herein from enforcing
the order above quoted.
The main respondent in this case, the First Mutual Savings and Loan Organization, Inc.
hereinafter referred to as the Organization is a registered non-stock corporation, the main
purpose of which, according to its Articles of Incorporation, dated February 14, 1961, is "to
encourage . . . and implement savings and thrift among its members, and to extend financial
assistance in the form of loans," to them. The Organization has three (3) classes of "members,"1
namely: (a) founder members who originally joined the organization and have signed the pre-
incorporation papers with the exclusive right to vote and be voted for ; (b) participating
members with "no right to vote or be voted for" to which category all other members
belong; except (c) honorary members, so made by the board of trustees, "at the exclusive
discretion" thereof due to "assistance, honor, prestige or help extended in the propagation"
of the objectives of the Organization without any pecuniary expenses on the part of said
honorary members.
34
 No. 337."4 Said articles, papers or effects are described in the aforementioned Annex A, as
On February 14, 1962, the legal department of the Central Bank of the Philippines hereinafter follows:
referred to as the Bank rendered an opinion to the effect that the Organization and others of
similar nature are banking institutions, falling within the purview of the Central Bank Act.2 I. BOOKS OF ORIGINAL ENTRY
Hence, on April 1 and 3, 1963, the Bank caused to be published in the newspapers the following:
(1) General Journal
ANNOUNCEMENT (2) Columnar Journal or Cash Book
(a) Cash Receipts Journal or Cash Receipt Book
To correct any wrong impression which recent newspaper reports on "savings and loan (b) Cash Disbursements Journal or Cash Disbursement Book
associations" may have created in the minds of the public and other interested parties, as well
as to answer numerous inquiries from the public, the Central Bank of the Philippines wishes to II. BOOKS OF FINAL ENTRY
announce that all "savings and loan associations" now in operation and other organizations
using different corporate names, but engaged in operations similar in nature to said (1) General Ledger
"associations" HAVE NEVER BEEN AUTHORIZED BY THE MONETARY BOARD OF THE CENTRAL (2) Individual Deposits and Loans Ledgers
BANK OF THE PHILIPPINES TO ACCEPT DEPOSIT OF FUNDS FROM THE PUBLIC NOR TO ENGAGE (3) Other Subsidiary Ledgers
IN THE BANKING BUSINESS NOR TO PERFORM ANY BANKING ACTIVITY OR FUNCTION IN THE
PHILIPPINES. III. OTHER ACCOUNTING RECORDS

Such institutions violate Section. 2 of the General Banking Act, Republic Act No. 337, should they (1) Application for Membership
engage in the "lending of funds obtained from the public through the receipts of deposits or the (2) Signature Card
sale of bonds, securities or obligations of any kind" without authority from the Monetary Board. (3) Deposit Slip
Their activities and operations are not supervised by the Superintendent of Banks and persons (4) Passbook Slip
dealing with such institutions do so at their risk. (5) Withdrawal Slip
(6) Tellers Daily Deposit Report
CENTRAL BANK OF THE PHILIPPINES (7) Application for Loan Credit Statement
(8) Credit Report
Moreover, on April 23, 1962, the Governor of the Bank directed the coordination of "the (9) Solicitor's Report
investigation and gathering of evidence on the activities of the savings and loan associations (10) Promissory Note
which are operating contrary to law." Soon thereafter, or on May 18, 1962, a member of the (11) I n d o r s e m e n t
intelligence division of the Bank filed with the Municipal Court of Manila a verified application (12) Co-makers' Statements
for a search warrant against the Organization, alleging that "after close observation and (13) Chattel Mortgage Contracts
personal investigation, the premises at No. 2745 Rizal Avenue, Manila" in which the offices (14) Real Estate Mortgage Contracts
of the Organization were housed "are being used unlawfully," because said Organization is (15) Trial Balance
illegally engaged in banking activities, "by receiving deposits of money for deposit, (16) Minutes Book Board of Directors
disbursement, safekeeping or otherwise or transacts the business of a savings and mortgage
bank and/or building and loan association . . . without having first complied with the provisions IV. FINANCIAL STATEMENTS
of Republic Act No. 337" and that the articles, papers, or effects enumerated in a list attached
to said application, as Annex A thereof.3 are kept in said premises, and "being used or intended (1) Income and Expenses Statements
to be used in the commission of a felony, to wit: violation of Sections 2 and 6 of Republic Act (2) Balance Sheet or Statement of Assets and Liabilities

35
V. OTHERS
(1) Articles of Incorporation
(2) By-Laws
(3) Prospectus, Brochures Etc.
(4) And other documents and articles which are being used or intended to be used in
unauthorized banking activities and operations contrary to law.
Upon the filing of said application, on May 18, 1962, Hon. Roman Cancino, as Judge of the said
municipal court, issued the warrant above referred to,5 commanding the search of the aforesaid
premises at No. 2745 Rizal Avenue, Manila, and the seizure of the foregoing articles, there being
"good and sufficient reasons to believe" upon examination, under oath, of a detective of the
Manila Police Department and said intelligence officer of the Bank that the Organization has
under its control, in the address given, the aforementioned articles, which are the subject of the
offense adverted to above or intended to be used as means for the commission of said off
offense.
Forthwith, or on the same date, the Organization commenced Civil Case No. 50409 of the Court
of First Instance of Manila, an original action for "certiorari, prohibition, with writ of preliminary
injunction and/or writ of preliminary mandatory injunction," against said municipal court, the
Sheriff of Manila, the Manila Police Department, and the Bank, to annul the aforementioned
search warrant, upon the ground that, in issuing the same, the municipal court had acted "with
grave abuse of discretion, without jurisdiction and/or in excess of jurisdiction" because: (a) "said
search warrant is a roving commission general in its terms . . .;" (b) "the use of the word 'and
others' in the search warrant . . . permits the unreasonable search and seizure of documents
which have no relation whatsoever to any specific criminal act . . .;" and (c) "no court in the
Philippines has any jurisdiction to try a criminal case against a corporation . . ."
The Organization, likewise, prayed that, pending hearing of the case on the merits, a writ of
preliminary injunction be issued ex parte restraining the aforementioned search and seizure, or,
in the alternative, if the acts complained of have been partially performed, that a writ of
preliminary mandatory injunction be forthwith issued ex parte, ordering the preservation of the
status quo of the parties, as well as the immediate return to the Organization of the documents
and papers so far seized under, the search warrant in question. After due hearing, on the
petition for said injunction, respondent, Hon. Jesus P. Morfe, Judge, who presided over the
branch of the Court of First Instance of Manila to which said Case No. 50409 had been assigned,
issued, on July 2, 1962, the order complained of.
Within the period stated in said order, the Bank moved for a reconsideration thereof, which was
denied on August 7, 1962. Accordingly, the Bank commenced, in the Supreme Court, the present
action, against Judge Morfe and the Organization, alleging that respondent Judge had acted with
grave abuse of discretion and in excess of his jurisdiction in issuing the order in question.
At the outset, it should be noted that the action taken by the Bank, in causing the
aforementioned search to be made and the articles above listed to be seized, was predicated
upon the theory that the Organization was illegally engaged in banking by receiving money
for deposit, disbursement, safekeeping or otherwise, or transacting the business of a savings
and mortgage bank and/or building and loan association, without first complying with the
provisions of R.A. No. 337, and that the order complained of assumes that the Organization had
violated sections 2 and 6 of said Act.6 Yet respondent Judge found the searches and, seizures in
question to be unreasonable, through the following process of reasoning: the deposition given
in support of the application for a search warrant states that the deponent personally knows
that the premises of the Organization, at No. 2745 Rizal Avenue, Manila,7 were being used
unlawfully for banking and purposes. Respondent judge deduce, from this premise, that the
deponent " knows specific banking transactions of the petitioner with specific persons," and,
then concluded that said deponent ". . . could have, if he really knew of actual violation of the
law, applied for a warrant to search and seize only books" or records:
covering the specific purportedly illegal banking transactions of the petitioner with specific
persons who are the supposed victims of said illegal banking transactions according to his
knowledge. To authorize and seize all the records listed in Annex A to said application for search
warrant, without reference to specific alleged victims of the purported illegal banking
transactions, would be to harass the petitioner, and its officers with a roving commission or
fishing expedition for evidence which could be discovered by normal intelligence operations or
inspections (not seizure) of books and records pursuant to Section 4 of Republic Act No 337 . .
."
The concern thus shown by respondent judge for the civil liberty involved is, certainly, in line
with the function of courts, as ramparts of justice and liberty and deserves the greatest
encouragement and warmest commendation. It lives up to the highest traditions of the
Philippine Bench, which underlies the people's faith in and adherence to the Rule of Law and
the democratic principle in this part of the World.
At the same time, it cannot be gainsaid the Constitutional injunction against unreasonable
searches and seizures seeks to forestall, not purely abstract or imaginary evils, but specific and
concrete ones. Indeed, unreasonableness is, in the very nature of things, a condition dependent
upon the circumstances surrounding each case, in much the same way as the question whether
or not "probable cause" exists is one which must be decided in the light of the conditions
obtaining in given situations.
36
Referring particularly to the one at bar, it is not clear from the order complained of whether
respondent Judge opined that the above mentioned statement of the deponent to the effect
that the Organization was engaged in the transactions mentioned in his deposition deserved
of credence or not. Obviously, however, a mere disagreement with Judge Cancino, who issued
the warrant, on the credibility of said statement, would not justify the conclusion that said
municipal Judge had committed a grave abuse of discretion, amounting to lack of jurisdiction or
excess of jurisdiction. Upon the other hand, the failure of the witness to mention particular
individuals does not necessarily prove that he had no personal knowledge of specific illegal
transactions of the Organization, for the witness might be acquainted with specific transactions,
even if the names of the individuals concerned were unknown to him.
Again, the aforementioned order would seem to assume that an illegal banking transaction, of
the kind contemplated in the contested action of the officers of the Bank, must always connote
the existence of a "victim." If this term is used to denote a party whose interests have been
actually injured, then the assumption is not necessarily justified. The law requiring compliance
with certain requirements before anybody can engage in banking obviously seeks to protect the
public against actual, as well as potential, injury. Similarly, we are not aware of any rule limiting
the use of warrants to papers or effects which cannot be secured otherwise.
by exacting compliance with the requirements of said Act, before the transactions in question
could be undertaken.
It is interesting to note, also, that the Organization does not seriously contest the main facts,
upon which the action of the Bank is based. The principal issue raised by the Organization is
predicated upon the theory that the aforementioned transactions of the Organization do not
amount to " banking," as the term is used in Republic Act No. 337. We are satisfied, however, in
the light of the circumstance obtaining in this case, that the Municipal Judge did not commit a
grave abuse of discretion in finding that there was probable cause that the Organization had
violated Sections 2 and 6 of the aforesaid law and in issuing the warrant in question, and that,
accordingly, and in line with Alverez vs. Court of First Instance (64 Phil. 33), the search and
seizure complained of have not been proven to be unreasonable.
Wherefore, the order of respondent Judge dated July 2, 1962, and the writ of preliminary
mandatory injunction issued in compliance therewith are hereby annulled, and the writ of
preliminary injunction issued by this Court on August 14, 1962, accordingly, made permanent,
with costs against respondent First Mutual Savings and Loan Organization, Inc. It is so ordered.

The line of reasoning of respondent Judge might, perhaps, be justified if the acts imputed to the
Organization consisted of isolated transactions, distinct and different from the type of business
in which it is generally engaged. In such case, it may be necessary to specify or identify the
parties involved in said isolated transactions, so that the search and seizure be limited to the
records pertinent thereto. Such, however, is not the situation confronting us. The records
suggest clearly that the transactions objected to by the Bank constitute the general pattern of
the business of the Organization. Indeed, the main purpose thereof, according to its By-laws, is
"to extend financial assistance, in the form of loans, to its members," with funds deposited by
them.

It is true, that such funds are referred to in the Articles of Incorporation and the By-laws
as their "savings." and that the depositors thereof are designated as "members," but, even a
cursory examination of said documents will readily show that anybody can be a depositor and
thus be a "participating member." In other words, the Organization is, in effect, open to the
"public" for deposit accounts, and the funds so raised may be lent by the Organization.
Moreover, the power to so dispose of said funds is placed under the exclusive authority of the
"founder members," and "participating members" are expressly denied the right to vote or be
voted for, their "privileges and benefits," if any, being limited to those which the board of
trustees may, in its discretion, determine from time to time. As a consequence, the
"membership" of the "participating members" is purely nominal in nature. This situation is
fraught, precisely, with the very dangers or evils which Republic Act No. 337 seeks to forestall,

37
 G.R. No. 128703 October 18, 2000
TEODORO BAAS,*C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, petitioners,
vs.
ASIA PACIFIC FINANCE CORPORATION, substituted by INTERNATIONAL CORPORATE BANK
now known as UNION BANK OF THE PHILIPPINES, respondent.
DECISION
BELLOSILLO, J.:
C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the reversal
of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for lack of merit and
affirming in toto the decision of the trial court holding them liable to Asia Pacific Finance
Corporation in the amount of 87,637.50 at 14% interest per annum in addition to attorney's
fees and costs of suit, as well as its 21 March 1997 Resolution denying reconsideration thereof.
On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a complaint for
a sum of money with prayer for a writ of replevin against Teodoro Baas, C. G. Dizon
Construction and Cenen Dizon. Sometime in August 1980 Teodoro Baas executed a Promissory
Note in favor of C. G. Dizon Construction whereby for value received he promised to pay to the
order of C. G. Dizon Construction the sum of 390,000.00 in installments of "32,500.00 every
25th day of the month starting from September 25, 1980 up to August 25, 1981."
Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA PACIFIC,
and to secure payment thereof, C. G. Dizon Construction, through its corporate officers, Cenen
Dizon, President, and Juliette B. Dizon, Vice President and Treasurer, executed a Deed of Chattel
Mortgage covering three (3) heavy equipment units of Caterpillar Bulldozer Crawler Tractors
with Model Nos. D8-14A, D8-2U and D8H in favor of ASIA PACIFIC.4 Moreover, Cenen Dizon
executed on 25 August 1980 a Continuing Undertaking wherein he bound himself to pay the
obligation jointly and severally with C. G. Dizon Construction.
In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made the
following installment payments to ASIA PACIFIC: 32,500.00 on 25 September 1980, 32,500.00
on 27 October 1980 and 65,000.00 on 27 February 1981, or a total of 130,000.00. Thereafter,
however, C. G. Dizon Construction defaulted in the payment of the remaining installments,
prompting ASIA PACIFIC to send a Statement of Account to Cenen Dizon for the unpaid balance
of 267,737.50 inclusive of interests and charges, and 66,909.38 representing attorney's fees.
As the demand was unheeded, ASIA PACIFIC sued Teodoro Baas, C. G. Dizon Construction and
Cenen Dizon.
While defendants (herein petitioners) admitted the genuineness and due execution of the
Promissory Note, the Deed of Chattel Mortgage and the Continuing Undertaking, they
nevertheless maintained that these documents were never intended by the parties to be legal,
valid and binding but a mere subterfuge to conceal the loan of 390,000.00 with usurious
interests.
Defendants claimed that since ASIA PACIFIC could not directly engage in banking business, it
proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to them without
violating banking laws: first, Cenen Dizon would secure a promissory note from Teodoro Baas
with a face value of 390,000.00 payable in installments; second, ASIA PACIFIC would then make
it appear that the promissory note was sold to it by Cenen Dizon with the 14% usurious interest
on the loan or 54,000.00 discounted and collected in advance by ASIA PACIFIC; and, lastly,
Cenen Dizon would provide sufficient collateral to answer for the loan in case of default in
payment and execute a continuing guaranty to assure continuous and prompt payment of the
loan. Defendants also alleged that out of the loan of 390,000.00 defendants actually received
only 329,185.00 after ASIA PACIFIC deducted the discounted interest, service handling charges,
insurance premium, registration and notarial fees.
Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed in
meeting his monthly amortization on account of business reverses and promised to pay instead
in February 1981. Cenen Dizon made good his promise and tendered payment to ASIA PACIFIC
in an amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC attempted to
impose a 3% interest for every month of delay, which he flatly refused to pay for being usurious.
Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender to it the
ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the
former's account as closed and the loan fully paid. Cenen Dizon supposedly agreed and accepted
the offer. Defendants averred that the value of the bulldozer crawler tractors was more than
adequate to cover their obligation to ASIA PACIFIC.
Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G.
Dizon Construction for the surrender of the bulldozer crawler tractors subject of the Deed of
Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned
over by defendants - D8-14A and D8-2U - which units were subsequently foreclosed by ASIA
PACIFIC to satisfy the obligation. D8-14A was sold for 120,000.00 and D8-2U for 60,000.00
both to ASIA PACIFIC as the highest bidder.
During the pendency of the case, defendant Teodoro Baas passed away, and on motion of the
remaining defendants, the trial court dismissed the case against him. On the other hand, ASIA
38
PACIFIC was substituted as party plaintiff by International Corporate Bank after the disputed
Promissory Note was assigned and/or transferred by ASIA PACIFIC to International Corporate
Bank. Later, International Corporate Bank merged with Union Bank of the Philippines. As the
surviving entity after the merger, and having succeeded to all the rights and interests of
International Corporate Bank in this case, Union Bank of the Philippines was substituted as a
party in lieu of International Corporate Bank.6
On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding the
defendants jointly and severally liable for the unpaid balance of the obligation under the
Promissory Note in the amount of 87,637.50 at 14% interest per annum, and attorney's fees
equivalent to 25% of the monetary award.7
On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus -
Defendant-appellants' contention that the instruments were executed merely as a subterfuge
to skirt banking laws is an untenable defense. If that were so then they too were parties to the
illegal scheme. Why should they now be allowed to take advantage of their own knavery to
escape the liabilities that their own chicanery created?
Defendant-appellants also want us to believe their story that there was an agreement between
them and the plaintiff-appellee that if the former would deliver their 2 bulldozer crawler tractors
to the latter, the defendant-appellants' obligation would fully be extinguished. Again, nothing
but the word that comes out between the teeth supports such story. Why did they not write
down such an important agreement? Is it believable that seasoned businessmen such as the
defendant-appellant Cenen G. Dizon and the other officers of the appellant corporation would
deliver the bulldozers without a receipt of acquittance from the plaintiff-appellee x x x x In our
book, that is not credible.
The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and
ASIA PACIFIC violated banking laws, hence, null and void; and (b) Whether the surrender of the
bulldozer crawler tractors to respondent resulted in the extinguishment of petitioners'
obligation.
On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment house
which could not engage in the lending of funds obtained from the public through receipt of
deposits. The disputed Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking
were not intended to be valid and binding on the parties as they were merely devices to conceal
their real intention which was to enter into a contract of loan in violation of banking laws.
We reject the argument. An investment company refers to any issuer which is or holds itself out
as being engaged or proposes to engage primarily in the business of investing, reinvesting or
trading in securities.8 As defined in Sec. 2, par. (a), of the Revised Securities Act,9 securities
"shall include x x x x commercial papers evidencing indebtedness of any person, financial or non-
financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner
conveyed to another with or without recourse, such as promissory notes x x x x" Clearly, the
transaction between petitioners and respondent was one involving not a loan but purchase of
receivables at a discount, well within the purview of "investing, reinvesting or trading in
securities" which an investment company, like ASIA PACIFIC, is authorized to perform and does
not constitute a violation of the General Banking Act.10 Moreover, Sec. 2 of the General Banking
Act provides in part -
Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in
the lending of funds obtained from the public through the receipt of deposits of any kind, and
all entities regularly conducting such operations shall be considered as banking institutions and
shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws
(underscoring supplied).
Indubitably, what is prohibited by law is for investment companies to lend funds obtained from
the public through receipts of deposit, which is a function of banking institutions. But here, the
funds supposedly "lent" to petitioners have not been shown to have been obtained from the
public by way of deposits, hence, the inapplicability of banking laws.
On petitioners' submission that the true intention of the parties was to enter into a contract of
loan, we have examined the Promissory Note and failed to discern anything therein that would
support such theory. On the contrary, we find the terms and conditions of the instrument clear,
free from any ambiguity, and expressive of the real intent and agreement of the parties. We
quote the pertinent portions of the Promissory Note -
FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon Construction, Inc.
the sum of THREE HUNDRED NINETY THOUSAND ONLY (390,000.00), Philippine Currency in the
following manner:
32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25,
1981.
I/We agree that if any of the said installments is not paid as and when it respectively falls due,
all the installments covered hereby and not paid as yet shall forthwith become due and payable
at the option of the holder of this note with interest at the rate of 14% per annum on each
unpaid installment until fully paid.
39

If any amount due on this note is not paid at its maturity and this note is placed in the hands of
an attorney for collection, I/We agree to pay in addition to the aggregate of the principal amount
and interest due, a sum equivalent to TEN PERCENT (10%) thereof as Attorney's fees, in case no
action is filed, otherwise, the sum will be equivalent to TWENTY FIVE (25%) of the said principal
amount and interest due x x x x
Makati, Metro Manila, August 25, 1980.
(Sgd) Teodoro Baas
ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON
CONSTRUCTION, INC.
By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon
President VP/Treasurer
Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly acknowledged
before a notary public and, as such, have in their favor the presumption of regularity. To
contradict them there must be clear, convincing and more than merely preponderant evidence.
In the instant case, the records do not show even a preponderance of evidence in favor of
petitioners' claim that the Deed of Chattel Mortgage and Continuing Undertaking were never
intended by the parties to be legal, valid and binding. Notarial documents are evidence of the
facts in clear and unequivocal manner therein expressed.11
Interestingly, petitioners' assertions were based mainly on the self-serving testimony of Cenen
Dizon, and not on any other independent evidence. His testimony is not only unconvincing, as
found by the trial court and the Court of Appeals, but also self-defeating in light of the
documents presented by respondent, i.e., Promissory Note, Deed of Chattel Mortgage and
Continuing Undertaking, the accuracy, correctness and due execution of which were admitted
by petitioners. Oral evidence certainly cannot prevail over the written agreements of the parties.
The courts need only rely on the faces of the written contracts to determine their true intention
on the principle that when the parties have reduced their agreements in writing, it is presumed
that they have made the writings the only repositories and memorials of their true agreement.
The second issue deals with a question of fact. We have ruled often enough that it is not the
function of this Court to analyze and weigh the evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been committed by the lower court.12 At any
rate, while we are not a trier of facts, hence, not required as a rule to look into the factual bases
of the assailed decision of the Court of Appeals, we did so just the same in this case if only to
satisfy petitioners that we have carefully studied and evaluated the case, all too mindful of the
tenacity and vigor with which the parties, through their respective counsel, have pursued this
case for nineteen (19) years.
Petitioners contend that the parties already had a verbal understanding wherein ASIA PACIFIC
actually agreed to consider petitioners' account closed and the principal obligation fully paid in
exchange for the ownership of the two (2) bulldozer crawler tractors.
We are not persuaded. Again, other than the bare allegations of petitioners, the records are
bereft of any evidence of the supposed agreement. As correctly observed by the Court of
Appeals, it is unbelievable that the parties entirely neglected to write down such an important
agreement. Equally incredulous is the fact that petitioner Cenen Dizon, a seasoned
businessman, readily consented to deliver the bulldozers to respondent without a
corresponding receipt of acquittance. Indeed, even the testimony of petitioner Cenen Dizon
himself negates the supposed verbal understanding between the parties -
Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of the
seizure order?
A: There was no seizure order. Atty. Carag during that time said if I surrender the two equipment,
we might finally close a deal if the equipment would come up to the balance of the loan. So I
voluntarily surrendered, I pulled them from the job site and returned them to APCOR x x x x
Q: You mentioned a certain Atty. Carag, who is he?
A: He was the former legal counsel of APCOR. They were handling cases.1wphi1 In fact, I talked
with Atty. Carag, we have a verbal agreement if I surrender the equipment it might suffice to
pay off the debt so I did just that (underscoring ours).13
In other words, there was no binding and perfected contract between petitioners and
respondent regarding the settlement of the obligation, but only a conditional one, a mere
conjecture in fact, depending on whether the value of the tractors to be surrendered would
equal the balance of the loan plus interests. And since the bulldozer crawler tractors were sold
at the foreclosure sale for only 180,000.00,14 which was not enough to cover the unpaid
balance of 267,637.50, petitioners are still liable for the deficiency.
Barring therefore a showing that the findings complained of are totally devoid of support in the
records, or that they are so glaringly erroneous as to constitute serious abuse of discretion, we
see no valid reason to discard them. More so in this case where the findings of both the trial
court and the appellate court coincide with each other on the matter.
With regard to the computation of petitioners' liability, the records show that petitioners
actually paid to respondent a total sum of 130,000.00 in addition to the 180,000.00 proceeds
realized from the sale of the bulldozer crawler tractors at public auction. Deducting these
40
amounts from the principal obligation of 390,000.00 leaves a balance of 80,000.00, to which
must be added 7,637.50 accrued interests and charges as of 20 March 1981, or a total unpaid
balance of 87,637.50 for which petitioners are jointly and severally liable. Furthermore, the
unpaid balance should earn 14% interest per annum as stipulated in the Promissory Note,
computed from 20 March 1981 until fully paid.

On the amount of attorney's fees which under the Promissory Note is equivalent to 25% of the
principal obligation and interests due, it is not, strictly speaking, the attorney's fees recoverable
as between the attorney and his client regulated by the Rules of Court. Rather, the attorney's
fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a
penal clause. It has been said that so long as such stipulation does not contravene the law,
morals and public order, it is strictly binding upon the obligor. It is the litigant, not the counsel,
who is the judgment creditor entitled to enforce the judgment by execution.15

Nevertheless, it appears that petitioners' failure to fully comply with their part of the bargain
was not motivated by ill will or malice, but due to financial distress occasioned by legitimate
business reverses. Petitioners in fact paid a total of 130,000.00 in three (3) installments, and
even went to the extent of voluntarily turning over to respondent their heavy equipment
consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to settle their
indebtedness in full. Article 1229 of the New Civil Code specifically empowers the judge to
equitably reduce the civil penalty when the principal obligation has been partly or irregularly
complied with. Upon the foregoing premise, we hold that the reduction of the attorney's fees
from 25% to 15% of the unpaid principal plus interests is in order.

Finally, while we empathize with petitioners, we cannot close our eyes to the overriding
considerations of the law on obligations and contracts which must be upheld and honored at all
times. Petitioners have undoubtedly benefited from the transaction; they cannot now be
allowed to impugn its validity and legality to escape the fulfillment of a valid and binding
obligation.

WHEREFORE, no reversible error having been committed by the Court of Appeals, its assailed
Decision of 24 July 1996 and its Resolution of 21 March 1997 are AFFIRMED. Accordingly,
petitioners C.G. Construction Inc. and Cenen Dizon are ordered jointly and severally to pay
respondent Asia Pacific Finance Corporation, substituted by International Corporate Bank (now
known as Union Bank of the Philippines), 87,637.50 representing the unpaid balance on the
Promissory Note, with interest at fourteen percent (14%) per annum computed from 20 March
1981 until fully paid, and fifteen percent (15%) of the principal obligation and interests due by
way of attorney's fees. Costs against petitioners. SO ORDERED.

41
II. Deposit Function

Richelle Ann Zamora

42
 G.R. No. L-43191 November 13, 1935
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal
interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and
the defendant to be absolved totally from the amended complaint. As it is conceded that the
plaintiff has already received the sum represented by the United States treasury, warrant, which
is in question, the appeal will thus determine the amount, if any, which should be paid to the
plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current account with the
bank.
It appears from the record that on August 2, 1933, the Treasurer of the United States for the
United States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of
Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check.
Thereupon it was cashed by the Philippine National Bank. Subsequently the treasury warrant
was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was P509.
Against this balance he had issued certain cheeks which could not be paid when the money was
sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas
which could not be delivered to him at that time because he was in Manila. In the bank's letter
of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed
that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos
for $361 or P722, the payment for which had been received has been returned by our Manila
office with the notation that the payment of his check has been stopped by the Insular
Treasurer. "In view of this therefore we have applied the outstanding balances of your current
accounts with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509.
On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received
and the unpaid balance of the United States Treasury warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which inconvenienced
Attorney Gullas. In the first place, as above indicated, checks including one for his insurance
were not paid because of the lack of funds standing to his credit in the bank. In the second place,
periodicals in the vicinity gave prominence to the news to the great mortification of
Gullas.lawphil.net
A variety of incidental questions have been suggested on the record which it can be taken for
granted as having been adversely disposed of in this opinion. The main issues are two, namely,
(1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to
the bank and (2) as to the amount damages, if any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195
et seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place
when two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195).
In his connection, it has been held that the relation existing between a depositor and a bank is
that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59
Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the liability of a general
indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable
instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly
taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In
this connection, it has been held a long line of authorities that notice of dishonor is in order to
charge all indorser and that the right of action against him does not accrue until the notice is
given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the
rule is denied, and it is held that a bank has no right, without an order from or special assent of
the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The
basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular
deposits, e. g., the deposit of money with a banker. With freedom of selection and after full
preference to the minority rule as more in harmony with modern banking practice. (1 Morse on
Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407;
Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L.
Ann., 604; 8 Manresa, Comentarios al Codigo Civil Espaol, 4th ed., 359 et seq., 11 Manresa pp.
694 et seq.)
43

Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The
fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting
for any action by Gullas, the bank made use of the money standing in his account to make good
for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued
in good faith.
As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of
a third party, it has been held that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has applied the funds so deposited
in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would
seem that notice is not necessary to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor. However this may be, as to an indorser the situation
is different, and notice should actually have been given him in order that he might protect his
interests.
We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to
follow up that statement with others proving exact damages is not so easy. For instance, for
alleged libelous articles the bank would not be primarily liable. The same remark could be made
relative to the loss of business which Gullas claims but which could not be traced definitely to
this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy
by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all
good faith, then, leave for Manila, and on return find that those checks had not been cashed
because of the action taken by the bank. That caused a disturbance in Gullas' finances, especially
with reference to his insurance, which was injurious to him. All facts and circumstances
considered, we are of the opinion that Gullas should be awarded nominal damages because of
the premature action of the bank against which Gullas had no means of protection, and have
finally determined that the amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with
the result that the judgment of the trial court will be modified by sentencing the defendant to
pay the plaintiff the sum of P250, and the costs of both instances.
G.R. Nos. 173654-765 August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People
of the Philippines, represented by the Office of the Solicitor General, praying for the reversal of
the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6th
Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed
against respondents Teresita Puig and Romeo Porras, and denying petitioners Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC
in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and
Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private
complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054
to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except
for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being the
Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the said
bank in the aforesaid amount.
44
After perusing the Informations in these cases, the trial court did not find the existence of
probable cause that would have necessitated the issuance of a warrant of arrest based on the
following grounds:
(1) the element of taking without the consent of the owners was missing on the ground that it
is the depositors-clients, and not the Bank, which filed the complaint in these cases, who are the
owners of the money allegedly taken by respondents and hence, are the real parties-in-interest;
and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree of
confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push
through would be violative of the right of the respondents under Section 14(2), Article III of the
1987 Constitution which states that in all criminal prosecutions, the accused shall enjoy the right
to be informed of the nature and cause of the accusation against him. Following Section 6, Rule
112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January 2006
and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion for Reconsideration was issued by the
RTC, finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The
Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising
the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30
January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed with
Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "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."
Thus, it posits that the depositors who place their money with the bank are considered creditors
of the bank. The bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of
qualified theft, citing that a perusal of the Informations will show that they specifically allege
that the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money with grave abuse of confidence, and
without the knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground
that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding
of probable cause for the issuance of a warrant of arrest presupposes evaluation of facts and
circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of
Justice, is the principal party to file a Petition for Review on Certiorari, considering that the
incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element of
taking, with intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found
the allegations in the Information inadequate. He ruled that the Information failed to state facts
constituting the qualifying circumstance of grave abuse of confidence and the element of taking
without the consent of the owner, since the owner of the money is not the Bank, but the
depositors therein. He also cites People v. Koc Song,4 in which this Court held:
45
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no
probable cause simply on the insufficiency of the allegations in the Informations concerning the
facts constitutive of the elements of the offense charged. This, therefore, makes the issue of
sufficiency of the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by
two degrees than those respectively specified in the next preceding article, if committed by a
domestic servant, or with grave abuse of confidence, or if the property stolen is motor vehicle,
mail matter or large cattle or consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil disturbance.
(Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of
anothers property without violence or intimidation against persons or force upon things. The
elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of
force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter
alia, that the information must state the acts or omissions complained of as constitutive of the
offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of
Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the
offense and the qualifying and aggravating circumstances must be stated in ordinary and concise
language and not necessarily in the language used in the statute but in terms sufficient to enable
a person of common understanding to know what offense is being charged as well as its
qualifying and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the
acts or omissions complained of as constituting the offense. The test is whether it enables a
person of common understanding to know the charge against him, and the court to render
judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave
abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come
into possession of the monies deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited, are considered the owners
thereof. This is very clear not only from the express provisions of the law, but from established
jurisprudence. The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out
by petitioner, provide as follows:
Article 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.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such employees acted with grave
46
abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to
it as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province
of Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named
accused ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base Savings
and Loan Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca,
Pampanga, and as such was authorized and reposed with the responsibility to receive and collect
capital contributions from its member/contributors of said corporation, and having collected
and received in her capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS
(P10,000.00), said accused, with intent of gain, with grave abuse of confidence and without the
knowledge and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine currency, by making
it appear that a certain depositor by the name of Antonio Salazar withdrew from his Savings
Account No. 1359, when in truth and in fact said Antonio Salazar did not withdr[a]w the said
amount of P10,000.00 to the damage and prejudice of BABSLA in the total amount of
P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the tellers
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified
Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13,
1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and there
wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and consent
of the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila
represented by its Branch Manager, HELEN U. FARGAS, to the damage and prejudice of the said
owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence
and unfaithfulness, he being the Branch Operation Officer of the said complainant and as such
he had free access to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and
Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he
not been holding the position of Luneta Branch Operation Officer which gave him not only sole
access to the bank vault xxx. The management of the PCIB reposed its trust and confidence in
the appellant as its Luneta Branch Operation Officer, and it was this trust and confidence which
he exploited to enrich himself to the damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of
possession by the Bank. The money in this case was in the possession of the defendant as
receiving teller of the bank, and the possession of the defendant was the possession of the Bank.
The Court held therein that when the defendant, with grave abuse of confidence, removed the
money and appropriated it to his own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions
of the respondents; that the crime was committed with grave abuse of confidence, with intent
to gain and without the knowledge and consent of the Bank, without necessarily stating the
phrase being assiduously insisted upon by respondents, "of a relation by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which respondents abused,"12 and without
employing the word "owner" in lieu of the "Bank" were considered to have satisfied the test of
sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this
case, there is even no reason to quibble on the allegation in the Informations that they acted
with grave abuse of confidence. In fact, the Information which alleged grave abuse of confidence
by accused herein is even more precise, as this is exactly the requirement of the law in qualifying
the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the
confidence reposed in them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of Qualified Theft.
47
On the theory of the defense that the DOJ is the principal party who may file the instant petition,
the ruling in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus
enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant
or the offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a reconsideration of the order of dismissal
or acquittal may be undertaken, whenever legally feasible, insofar as the criminal aspect thereof
is concerned and may be made only by the public prosecutor; or in the case of an appeal, by the
State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled
that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be
raised,14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer
look at the records of the preliminary investigation conducted will show that, indeed, probable
cause exists for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the
Rules of Court, the judge shall issue a warrant of arrest only upon a finding of probable cause
after personally evaluating the resolution of the prosecutor and its supporting evidence. Soliven
v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained that probable cause for the
issuance of a warrant of arrest is the existence of such facts and circumstances that would lead
a reasonably discreet and prudent person to believe that an offense has been committed by the
person sought to be arrested.17 The records reasonably indicate that the respondents may
have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the
case may be, to relieve the respondents from the pain of going through a trial once it is
ascertained that no probable cause exists to form a sufficient belief as to the guilt of the
respondents, conversely, it is also equally imperative upon the judge to proceed with the case
upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED.
The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-
3054 to 05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue
against herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68,
in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-
3165, inclusive, with reasonable dispatch. No pronouncement as to costs. 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:t.hqw
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
48
related Central Bank regulations on foreign exchange transactions, allegedly committed as
follows (Petition, Annex "A"):t.hqw following: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. 82-1695 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 counter-affidavit (Petition, Annex' C') stated the
"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 one-half 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. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because to do
so would be futile (Petition, p. 9) [pp. 153-157, 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. 81-31938.
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.
49
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:
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:
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 received Petitioners had no such obligation to return the same money, i.e., the bills or coins,
50
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 that: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 is essentially gratuitous.
"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
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.
51
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, 621-622 [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.
52
 G.R. No. 123498 November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost
fidelity. We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 43424 which affirmed with modification the judgment2 of the
Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank
(BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals,3
some of whom opened and maintained separate accounts with BPI-FB, San Francisco del Monte
(SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and
current account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the same branch of BPI-FB with a
deposit of 100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,4 savings,5
and time deposit,6 with BPI-FB. The current and savings accounts were respectively funded with
an initial deposit of 500,000.00 each, while the time deposit account had 1,000,000.00 with
a maturity date of August 31, 1990. The total amount of 2,000,000.00 used to open these
accounts is traceable to a check issued by Tevesteco allegedly in consideration of Francos
introduction of Eladio Teves,7 who was looking for a conduit bank to facilitate Tevestecos
business transactions, to Jaime Sebastian, who was then BPI-FB SFDMs Branch Manager. In
turn, the funding for the 2,000,000.00 check was part of the 80,000,000.00 debited by BPI-FB
from FMICs time deposit account and credited to Tevestecos current account pursuant to an
Authority to Debit purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority to Debit were
forged.8 On September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery. Unfortunately, Tevesteco had already
effected several withdrawals from its current account (to which had been credited the
80,000,000.00 covered by the forged Authority to Debit) amounting to 37,455,410.54,
including the 2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMICs forgery
claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin10
to debit Francos savings and current accounts for the amounts remaining therein.11 However,
Francos time deposit account could not be debited due to the capacity limitations of BPI-FBs
computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were
dishonored upon presentment for payment, and stamped with a notation "account under
garnishment." Apparently, Francos current account was garnished by virtue of an Order of
Attachment issued by the Regional Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996
(Makati Case), which had been filed by BPI-FB against Franco et al.,14 to recover the
37,455,410.54 representing Tevestecos total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB
prior to Francos receipt of notice that his accounts were under garnishment.15 In fact, at the
time the Notice of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had
yet to be impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint
in Civil Case No. 89-4996, that Franco was impleaded in the Makati case.16 Immediately, upon
receipt of such copy, Franco filed a Motion to Discharge Attachment which the Makati RTC
granted on May 16, 1990. The Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the funds in his savings and current
accounts. Jesus Arangorin, BPI-FBs new manager, could not forthwith comply with the demand
as the funds, as previously stated, had already been debited because of FMICs forgery claim. As
such, BPI-FBs computer at the SFDM Branch indicated that the current account record was "not
on file."
With respect to Francos savings account, it appears that Franco agreed to an arrangement, as
a favor to Sebastian, whereby 400,000.00 from his savings account was temporarily transferred
to Domingo Quiaoits savings account, subject to its immediate return upon issuance of a
certificate of deposit which Quiaoit needed in connection with his visa application at the Taiwan
Embassy. As part of the arrangement, Sebastian retained custody of Quiaoits savings account
passbook to ensure that no withdrawal would be effected therefrom, and to preserve Francos
deposits.
53

On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount
of 63,189.00 from the remaining balance of the time deposit account representing advance
interest paid to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of 80,000,000.00 debited
from its account.17 The case eventually reached this Court, and in BPI Family Savings Bank, Inc.
v. First Metro Investment Corporation,18 we upheld the finding of the courts below that BPI-FB
failed to exercise the degree of diligence required by the nature of its obligation to treat the
accounts of its depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the
debited amount in its time deposit. It was ordered to pay 65,332,321.99 plus interest at 17%
per annum from August 29, 1989 until fully restored. In turn, the 17% shall itself earn interest
at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.),19 recipients of a 500,000.00 check proceeding from the 80,000,000.00 mistakenly
credited to Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also
prevented from effecting withdrawals20 from their current account with BPI-FB, Bonifacio
Market, Edsa, Caloocan City Branch. Likewise, when the case was elevated to this Court
docketed as BPI Family Bank v. Buenaventura,21 we ruled that BPI-FB had no right to freeze
Buenaventura, et al.s accounts and adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the
perpetrators of the multi-million peso scam.22 In the criminal case, Franco, along with the other
accused, except for Manuel Bienvenida who was still at large, were acquitted of the crime of
Estafa as defined and penalized under Article 351, par. 2(a) of the Revised Penal Code.23
However, the civil case24 remains under litigation and the respective rights and liabilities of the
parties have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his accounts and
release his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit.
In his complaint, Franco prayed for the following reliefs: (1) the interest on the remaining
balance25 of his current account which was eventually released to him on October 31, 1991; (2)
the balance26 on his savings account, plus interest thereon; (3) the advance interest27 paid to
him which had been deducted when he pre-terminated his time deposit account; and (4) the
payment of actual, moral and exemplary damages, as well as attorneys fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco
and refusing to release his deposits, claiming that it had a better right to the amounts which
consisted of part of the money allegedly fraudulently withdrawn from it by Tevesteco and
ending up in Francos accounts. BPI-FB asseverated that the claimed consideration of
2,000,000.00 for the introduction facilitated by Franco between George Daantos and Eladio
Teves, on the one hand, and Jaime Sebastian, on the other, spoke volumes of Francos
participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads
as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and
against [BPI-FB], ordering the latter to pay to the former the following sums:
1. 76,500.00 representing the legal rate of interest on the amount of 450,000.00 from May
18, 1990 to October 31, 1991;
2. 498,973.23 representing the balance on [Francos] savings account as of May 18, 1990,
together with the interest thereon in accordance with the banks guidelines on the payment
therefor;
3. 30,000.00 by way of attorneys fees; and
4. 10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco
confined his appeal to the Manila RTCs denial of his claim for moral and exemplary damages,
and the diminutive award of attorneys fees. In affirming with modification the lower courts
decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification ordering [BPI-FB] to pay [Franco] 63,189.00 representing the interest deducted
from the time deposit of plaintiff-appellant. 200,000.00 as moral damages and 100,000.00 as
exemplary damages, deleting the award of nominal damages (in view of the award of moral and
54
exemplary damages) and increasing the award of attorneys fees from 30,000.00 to
75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right
to the deposits in the subject accounts which are part of the proceeds of a forged Authority to
Debit; (2) Franco is entitled to interest on his current account; (3) Franco can recover the
400,000.00 deposit in Quiaoits savings account; (4) the dishonor of Francos checks was not
legally in order; (5) BPI-FB is liable for interest on Francos time deposit, and for moral and
exemplary damages; and (6) BPI-FBs counter-claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally
freeze Francos accounts and preclude him from withdrawing his deposits. However, contrary
to the appellate courts ruling, we hold that Franco is not entitled to unearned interest on the
time deposit as well as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Francos accounts, BPI-FB urges
us that the legal consequence of FMICs forgery claim is that the money transferred by BPI-FB
to Tevesteco is its own, and considering that it was able to recover possession of the same when
the money was redeposited by Franco, it had the right to set up its ownership thereon and freeze
Francos accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example:
where Xs television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly
entrusts possession of the TV set to X, the latter would have the right to keep possession of the
property and preclude Z from recovering possession thereof. To bolster its position, BPI-FB cites
Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing
the price paid therefor.
BPI-FBs argument is unsound. To begin with, the movable property mentioned in Article 559 of
the Civil Code pertains to a specific or determinate thing.30 A determinate or specific thing is
one that is individualized and can be identified or distinguished from others of the same kind.31
In this case, the deposit in Francos accounts consists of money which, albeit characterized as a
movable, is generic and fungible.32 The quality of being fungible depends upon the possibility
of the property, because of its nature or the will of the parties, being substituted by others of
the same kind, not having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived
of a movable to recover the exact same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value thereof, which it had mistakenly
debited from FMICs account and credited to Tevestecos, and subsequently traced to Francos
account. In fact, this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked
its claim on the money itself which passed from one account to another, commencing with the
forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership,34 and this
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of
exchange, without other evidence of its title.35 Money, which had passed through various
transactions in the general course of banking business, even if of traceable origin, is no
exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FBs
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as
a legal consequence of its unauthorized transfer of FMICs deposits to Tevestecos account. BPI-
FB conveniently forgets that the deposit of money in banks is governed by the Civil Code
provisions on simple loan or mutuum.36 As there is a debtor-creditor relationship between a
bank and its depositor, BPI-FB ultimately acquired ownership of Francos deposits, but such
ownership is coupled with a corresponding obligation to pay him an equal amount on
demand.37 Although BPI-FB owns the deposits in Francos accounts, it cannot prevent him from
demanding payment of BPI-FBs obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when Franco issued checks drawn
55
against his current account, he had every right as creditor to expect that those checks would be
honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based
on its mere suspicion that the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take
whatever action it pleases on deposits which it supposes are derived from shady transactions,
would open the floodgates of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues to
resonate, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his lifes savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his
monthly bills and the payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo, and as promptly as possible. This
has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever directs.
A blunder on the part of the bank, such as the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not also financial loss and perhaps even civil
and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit and in
the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability
thereon to Franco and the other payees of checks issued by Tevesteco, or prevent withdrawals
from their respective accounts without the appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of 80,000,000.00 from FMICs to
Tevestecos account, when FMICs account was a time deposit and it had already paid advance
interest to FMIC. Considering that there is as yet no indubitable evidence establishing Francos
participation in the forgery, he remains an innocent party. As between him and BPI-FB, the
latter, which made possible the present predicament, must bear the resulting loss or
inconvenience.
Second. With respect to its liability for interest on Francos current account, BPI-FB argues that
its non-compliance with the Makati RTCs Order Lifting the Order of Attachment and the legal
consequences thereof, is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this
respect. The Manila RTCs order to pay interests on Francos current account arose from BPI-
FBs unjustified refusal to comply with its obligation to pay Franco pursuant to their contract of
mutuum. In other words, from the time BPI-FB refused Francos demand for the release of the
deposits in his current account, specifically, from May 17, 1990, interest at the rate of 12% began
to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences
of BPI-FBs non-compliance with the Order Lifting the Order of Attachment. However, such
authority does not preclude the Manila RTC from ruling on BPI-FBs liability to Franco for
payment of interest based on its continued and unjustified refusal to perform a contractual
obligation upon demand. After all, this was the core issue raised by Franco in his complaint
before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoits account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually
owned by Franco who simply accommodated Jaime Sebastians request to temporarily transfer
400,000.00 from Francos savings account to Quiaoits account.40 His testimony cannot be
characterized as hearsay as the records reveal that he had personal knowledge of the
arrangement made between Franco, Sebastian and himself.41
BPI-FB makes capital of Francos belated allegation relative to this particular arrangement. It
insists that the transaction with Quiaoit was not specifically alleged in Francos complaint before
the Manila RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue
given its extensive cross-examination of Quiaoit.
56

Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence. When issues not
raised by the pleadings are tried with the express or implied consent of the parties, they shall
be treated in all respects as if they had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after judgment; but failure to
amend does not affect the result of the trial of these issues. If evidence is objected to at the trial
on the ground that it is now within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the presentation of the merits of the
action and the ends of substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made. (Emphasis supplied)
In all, BPI-FBs argument that this case is not the right forum for Franco to recover the
400,000.00 begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally
disclaimed ownership of the funds in his account, and pointed to Franco as the actual owner
thereof. Clearly, Francos action for the recovery of his deposits appropriately covers the
deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of
Francos checks respectively dated September 11 and 18, 1989 was legally in order in view of
the Makati RTCs supplemental writ of attachment issued on September 14, 1989. It posits that
as the party that applied for the writ of attachment before the Makati RTC, it need not be served
with the Notice of Garnishment before it could place Francos accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FBs clever but transparent ploy to
circumvent Section 4,42 Rule 13 of the Rules of Court. It should be noted that the strict
requirement on service of court papers upon the parties affected is designed to comply with the
elementary requisites of due process. Franco was entitled, as a matter of right, to notice, if the
requirements of due process are to be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days after the two checks he issued were
dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was premature for BPI-FB to
freeze Francos accounts without even awaiting service of the Makati RTCs Notice of
Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be
made without including in the main suit the owner of the property attached by virtue thereof.
Section 5, Rule 13 of the Rules of Court specifically provides that "no levy or attachment
pursuant to the writ issued x x x shall be enforced unless it is preceded, or contemporaneously
accompanied, by service of summons, together with a copy of the complaint, the application for
attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to
acquire jurisdiction over the person of Franco when BPI-FB garnished his accounts.43 Effectively,
therefore, the Makati RTC had no authority yet to bind the deposits of Franco through the writ
of attachment, and consequently, there was no legal basis for BPI-FB to dishonor the checks
issued by Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the advance
interest it deducted from Francos time deposit account, and for moral as well as exemplary
damages, we find it proper to reinstate the ruling of the trial court, and allow only the recovery
of nominal damages in the amount of 10,000.00. However, we retain the CAs award of
75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its
obligation to Franco; (2) misleadingly claimed that Francos deposits were under garnishment;
(3) misrepresented that Francos current account was not on file; and (4) refused to return the
400,000.00 despite the fact that the ostensible owner, Quiaoit, wanted the amount returned
to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be those that are the natural and probable consequences of the breach
of the obligation, and which the parties have foreseen or could have reasonable foreseen at the
time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.
(Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not
out of malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article
2201 and should not be held liable for all damages now being imputed to it for its breach of
obligation. For the same reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud.44 We
57
have held that it is a breach of a known duty through some motive of interest or ill will.45 In the
instant case, we cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the
trial court found, there was no denial whatsoever by BPI-FB of the existence of the accounts.
The computer-generated document which indicated that the current account was "not on file"
resulted from the prior debit by BPI-FB of the deposits. The remedy of freezing the account, or
the garnishment, or even the outright refusal to honor any transaction thereon was resorted to
solely for the purpose of holding on to the funds as a security for its intended court action,46
and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral damages cannot
be awarded; and that the adverse result of an action does not per se make the action wrongful,
or the party liable for it. One may err, but error alone is not a ground for granting such
damages.48
An award of moral damages contemplates the existence of the following requisites: (1) there
must be an injury clearly sustained by the claimant, whether physical, mental or psychological;
(2) there must be a culpable act or omission factually established; (3) the wrongful act or
omission of the defendant is the proximate cause of the injury sustained by the claimant; and
(4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil
Code.49
Francos savings account. This refusal constrained Franco to incur expenses and litigate for
almost two (2) decades in order to protect his interests and recover his deposits. Therefore, this
Court deems it just and equitable to grant Franco 75,000.00 as attorneys fees. The award is
reasonable in view of the complexity of the issues and the time it has taken for this case to be
resolved.56
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs ruling, as
affirmed by the CA, that BPI-FB is not entitled to recover 3,800,000.00 as actual damages. BPI-
FBs alleged loss of profit as a result of Francos suit is, as already pointed out, of its own making.
Accordingly, the denial of its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated
November 29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest
on the time deposit and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code,50 upon which to base his claim for moral damages.1wphi1

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article
2220 of the Civil Code for breach of contract.51

We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of
whether exemplary damages should be awarded to him.52 As there is no basis for the award of
moral damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate,53 we, however, find that
Franco is entitled to reasonable attorneys fees for having been compelled to go to court in order
to assert his right. Thus, we affirm the CAs grant of 75,000.00 as attorneys fees.

Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to
protect his interest,54 or when the court deems it just and equitable.55 In the case at bench,
BPI-FB refused to unfreeze the deposits of Franco despite the Makati RTCs Order Lifting the
Order of Attachment and Quiaoits unwavering assertion that the 400,000.00 was part of

58
 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.
DAVIDE, JR., J.:
The petitioner urges us to review and set aside the amended Decision1 of 6 March 1992 of
respondent Court of Appeals in CA- G.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-in-interest
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
59
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. 87- 42967 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-in-interest, 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
60
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.
61
 G.R. No. 82027 March 29, 1990
ROMARICO G. VITUG, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, respondents.
SARMIENTO, J.:
This case is a chapter in an earlier suit decided by this Court 1 involving the probate of the two
wills of the late Dolores Luchangco Vitug, who died in New York, U. S.A., on November 10, 1980,
naming private respondent Rowena Faustino-Corona executrix. In our said decision, we upheld
the appointment of Nenita Alonte as co-special administrator of Mrs. Vitug's estate with her
(Mrs. Vitug's) widower, petitioner Romarico G. Vitug, pending probate.
On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate
court to sell certain shares of stock and real properties belonging to the estate to cover allegedly
his advances to the estate in the sum of P667,731.66, plus interests, which he claimed were
personal funds. As found by the Court of Appeals, 2 the alleged advances consisted of
P58,147.40 spent for the payment of estate tax, P518,834.27 as deficiency estate tax, and
P90,749.99 as "increment thereto." 3 According to Mr. Vitug, he withdrew the sums of
P518,834.27 and P90,749.99 from savings account No. 35342-038 of the Bank of America,
Makati, Metro Manila.
On April 12, 1985, Rowena Corona opposed the motion to sell on the ground that the same
funds withdrawn from savings account No. 35342-038 were conjugal partnership properties and
part of the estate, and hence, there was allegedly no ground for reimbursement. She also sought
his ouster for failure to include the sums in question for inventory and for "concealment of funds
belonging to the estate." 4
Vitug insists that the said funds are his exclusive property having acquired the same through a
survivorship agreement executed with his late wife and the bank on June 19, 1970. The
agreement provides:
We hereby agree with each other and with the BANK OF AMERICAN NATIONAL TRUST AND
SAVINGS ASSOCIATION (hereinafter referred to as the BANK), that all money now or hereafter
deposited by us or any or either of us with the BANK in our joint savings current account shall
be the property of all or both of us and shall be payable to and collectible or withdrawable by
either or any of us during our lifetime, and after the death of either or any of us shall belong to
and be the sole property of the survivor or survivors, and shall be payable to and collectible or
withdrawable by such survivor or survivors.
We further agree with each other and the BANK that the receipt or check of either, any or all of
us during our lifetime, or the receipt or check of the survivor or survivors, for any payment or
withdrawal made for our above-mentioned account shall be valid and sufficient release and
discharge of the BANK for such payment or withdrawal. 5
The trial courts 6 upheld the validity of this agreement and granted "the motion to sell some of
the estate of Dolores L. Vitug, the proceeds of which shall be used to pay the personal funds of
Romarico Vitug in the total sum of P667,731.66 ... ." 7
On the other hand, the Court of Appeals, in the petition for certiorari filed by the herein private
respondent, held that the above-quoted survivorship agreement constitutes a conveyance
mortis causa which "did not comply with the formalities of a valid will as prescribed by Article
805 of the Civil Code," 8 and secondly, assuming that it is a mere donation inter vivos, it is a
prohibited donation under the provisions of Article 133 of the Civil Code. 9
The dispositive portion of the decision of the Court of Appeals states:
WHEREFORE, the order of respondent Judge dated November 26, 1985 (Annex II, petition) is
hereby set aside insofar as it granted private respondent's motion to sell certain properties of
the estate of Dolores L. Vitug for reimbursement of his alleged advances to the estate, but the
same order is sustained in all other respects. In addition, respondent Judge is directed to include
provisionally the deposits in Savings Account No. 35342-038 with the Bank of America, Makati,
in the inventory of actual properties possessed by the spouses at the time of the decedent's
death. With costs against private respondent. 10
In his petition, Vitug, the surviving spouse, assails the appellate court's ruling on the strength of
our decisions in Rivera v. People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in which
we sustained the validity of "survivorship agreements" and considering them as aleatory
contracts. 13
The petition is meritorious.
The conveyance in question is not, first of all, one of mortis causa, which should be embodied
in a will. A will has been defined as "a personal, solemn, revocable and free act by which a
capacitated person disposes of his property and rights and declares or complies with duties to
take effect after his death." 14 In other words, the bequest or device must pertain to the
testator. 15 In this case, the monies subject of savings account No. 35342-038 were in the nature
of conjugal funds In the case relied on, Rivera v. People's Bank and Trust Co., 16 we rejected
62
claims that a survivorship agreement purports to deliver one party's separate properties in favor
of the other, but simply, their joint holdings:
xxx xxx xxx
... Such conclusion is evidently predicated on the assumption that Stephenson was the exclusive
owner of the funds-deposited in the bank, which assumption was in turn based on the facts (1)
that the account was originally opened in the name of Stephenson alone and (2) that Ana Rivera
"served only as housemaid of the deceased." But it not infrequently happens that a person
deposits money in the bank in the name of another; and in the instant case it also appears that
Ana Rivera served her master for about nineteen years without actually receiving her salary from
him. The fact that subsequently Stephenson transferred the account to the name of himself
and/or Ana Rivera and executed with the latter the survivorship agreement in question although
there was no relation of kinship between them but only that of master and servant, nullifies the
assumption that Stephenson was the exclusive owner of the bank account. In the absence, then,
of clear proof to the contrary, we must give full faith and credit to the certificate of deposit
which recites in effect that the funds in question belonged to Edgar Stephenson and Ana Rivera;
that they were joint (and several) owners thereof; and that either of them could withdraw any
part or the whole of said account during the lifetime of both, and the balance, if any, upon the
death of either, belonged to the survivor. 17
xxx xxx xxx
In Macam v. Gatmaitan, 18 it was held:
xxx xxx xxx
This Court is of the opinion that Exhibit C is an aleatory contract whereby, according to article
1790 of the Civil Code, one of the parties or both reciprocally bind themselves to give or do
something as an equivalent for that which the other party is to give or do in case of the
occurrence of an event which is uncertain or will happen at an indeterminate time. As already
stated, Leonarda was the owner of the house and Juana of the Buick automobile and most of
the furniture. By virtue of Exhibit C, Juana would become the owner of the house in case
Leonarda died first, and Leonarda would become the owner of the automobile and the furniture
if Juana were to die first. In this manner Leonarda and Juana reciprocally assigned their
respective property to one another conditioned upon who might die first, the time of death
determining the event upon which the acquisition of such right by the one or the other
depended. This contract, as any other contract, is binding upon the parties thereto. Inasmuch
as Leonarda had died before Juana, the latter thereupon acquired the ownership of the house,
in the same manner as Leonarda would have acquired the ownership of the automobile and of
the furniture if Juana had died first. 19
xxx xxx xxx
There is no showing that the funds exclusively belonged to one party, and hence it must be
presumed to be conjugal, having been acquired during the existence of the marita. relations. 20
Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it
was to take effect after the death of one party. Secondly, it is not a donation between the
spouses because it involved no conveyance of a spouse's own properties to the other.
It is also our opinion that the agreement involves no modification petition of the conjugal
partnership, as held by the Court of Appeals, 21 by "mere stipulation" 22 and that it is no "cloak"
23 to circumvent the law on conjugal property relations. Certainly, the spouses are not
prohibited by law to invest conjugal property, say, by way of a joint and several bank account,
more commonly denominated in banking parlance as an "and/or" account. In the case at bar,
when the spouses Vitug opened savings account No. 35342-038, they merely put what rightfully
belonged to them in a money-making venture. They did not dispose of it in favor of the other,
which would have arguably been sanctionable as a prohibited donation. And since the funds
were conjugal, it can not be said that one spouse could have pressured the other in placing his
or her deposits in the money pool.
The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in
reality, that contract imposed a mere obligation with a term, the term being death. Such
agreements are permitted by the Civil Code. 24
Under Article 2010 of the Code:
ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to
give or to do something in consideration of what the other shall give or do upon the happening
of an event which is uncertain, or which is to occur at an indeterminate time.
Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the
happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value
of currency, and insurance have been held to fall under the first category, while a contract for
life annuity or pension under Article 2021, et sequentia, has been categorized under the second.
25 In either case, the element of risk is present. In the case at bar, the risk was the death of one
party and survivorship of the other.
63

However, as we have warned:
xxx xxx xxx
But although the survivorship agreement is per se not contrary to law its operation or effect
may be violative of the law. For instance, if it be shown in a given case that such agreement is a
mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat
the legitime of a forced heir, it may be assailed and annulled upon such grounds. No such vice
has been imputed and established against the agreement involved in this case. 26
xxx xxx xxx
There is no demonstration here that the survivorship agreement had been executed for such
unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills,
donations, and conjugal partnership.
The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the
latter has acquired upon her death a vested right over the amounts under savings account No.
35342-038 of the Bank of America. Insofar as the respondent court ordered their inclusion in
the inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate
property of petitioner, it forms no more part of the estate of the deceased.
WHEREFORE, the decision of the respondent appellate court, dated June 29, 1987, and its
resolution, dated February 9, 1988, are SET ASIDE.
No costs.
SO ORDERED.
G.R. No. 69162 February 21, 1992
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and the SPOUSES ARTHUR CANLAS and VIVIENE
CANLAS, respondents.
Leonen, Ramirez & Associates for petitioner.
L. Emmanuel B. Canilao for private respondents.
GRIO-AQUINO, J.:
In a decision dated September 3, 1984, the Intermediate Appellate Court (now Court of Appeals)
in AC-G.R. CV No. 69178 entitled, "Arthur A. Canlas, et al., Plaintiff-Appellees vs. Commercial
Bank and Trust Company of the Philippines, Defendant-Appellant," reduced to P105,000 the
P465,000 damage-award of the trial court to the private respondents for an error of a bank teller
which resulted in the dishonor of two small checks which the private respondents had issued
against their joint current account. This petition for review of that decision was filed by the Bank.
The respondent spouses, Arthur and Vivienne Canlas, opened a joint current account No. 210-
520-73 on April 25, 1977 in the Quezon City branch of the Commercial Bank and Trust Company
of the Philippines (CBTC) with an initial deposit of P2,250. Prior thereto, Arthur Canlas had an
existing separate personal checking account No. 210-442-41 in the same branch.
When the respondent spouses opened their joint current account, the "new accounts" teller of
the bank pulled out from the bank's files the old and existing signature card of respondent
Arthur Canlas for Current Account No. 210-442-41 for use as I D and reference. By mistake, she
placed the old personal account number of Arthur Canlas on the deposit slip for the new joint
checking account of the spouses so that the initial deposit of P2,250 for the joint checking
account was miscredited to Arthur's personal account (p. 9, Rollo). The spouses subsequently
deposited other amounts in their joint account.
However, when respondent Vivienne Canlas issued a check for Pl,639.89 in April 1977 and
another check for P1,160.00 on June 1, 1977, one of the checks was dishonored by the bank for
insufficient funds and a penalty of P20 was deducted from the account in both instances. In view
of the overdrawings, the bank tried to call up the spouses at the telephone number which they
had given in their application form, but the bank could not contact them because they actually
64
reside in Porac, Pampanga. The city address and telephone number which they gave to the bank
belonged to Mrs. Canlas' parents. 3. Exemplary damages is likewise reduced to the sum of P50,000.00 and attorney's fees to
P5,000.00.
On December 15, 1977, the private respondents filed a complaint for damages against CBTC in
the Court of First Instance of Pampanga (p. 113, Rollo). Costs against the defendants appellant. (p. 40, Rollo.)

On February 27, 1978, the bank filed a motion to dismiss the complaint for improper venue. The
motion was denied.
During the pendency of the case, the Bank of the Philippine Islands (BPI) and CBTC were merged.
As the surviving corporation under the merger agreement and under Section 80 (5) of the
Corporation Code of the Philippines, BPI took over the prosecution and defense of any pending
claims, actions or proceedings by and against CBTC.
Petitioner filed this petition for review alleging that the appellate court erred in holding that:
1. The venue of the case had been properly laid at Pampanga in the light of private
respondents' earlier declaration that Quezon City is their true residence.
2. The petitioner was guilty of gross negligence in the handling of private respondents'
bank account.

On May 5, 1981, the Regional Trial Court of Pampanga rendered a decision against BPI, the 3. Private respondents are entitled to the moral and exemplary damages and attorney's
dispositive portion of which reads: fees adjudged by the respondent appellate court.

WHEREFORE, judgment is hereby rendered sentencing defendant to pay the plaintiff the On the question of venue raised by petitioner, it is evident that personal actions may be
following: instituted in the Court of First Instance (now Regional Trial Court) of the province where the
defendant or any of the defendants resides or may be found, or where the plaintiff or any of the
1. P 5,000.00 as actual damages; plaintiffs resides, at the election of the plaintiff (Section 2[b], Rule 4 of the Rules of Court). In
this case, there was ample proof that the residence of the plaintiffs is B. Sacan, Porac, Pampanga
2. P 150,000.00 for plaintiff Arthur Canlas and P150,000.00 for plaintiff Vivienne S. Canlas (p. 117, Rollo). The city address of Mrs. Canlas' parents was placed by the private respondents
representing moral damages; in their application for a joint checking account, at the suggestion of the new accounts teller,
presumably to facilitate mailing of the bank statements and communicating with the private
3. P 150.000.00 as exemplary damages; respondents in case any problems should arise involving the account. No waiver of their
provincial residence for purposes of determining the venue of an action against the bank may
4. P 10,000.00 as attorney's fees; and be inferred from the so-called "misrepresentation" of their true residence.

5. Costs. (p. 36, Rollo).
On appeal, the Intermediate Appellate Court deleted the actual damages and reduced the other
awards. The dispositive portion of its decision reads:
WHEREFORE, the judgment appealed from is hereby modified as follows:
The appellate court based its award of moral and exemplary damages, and attorney's fees on its
finding that the mistake committed by the new accounts teller of the petitioner constituted
"serious" negligence (p. 38, Rollo). Said court further stressed that it cannot absolve the
petitioner from liability for damages to the private respondents, even on the assumption of an
honest mistake on its part, because of the embarrassment that even an honest mistake can
cause its depositors (p. 31, Rollo).

1. The award of P50,000.00 in actual damages is herewith deleted. There is no merit in petitioner's argument that it should not be considered negligent, much less
held liable for damages on account of the inadvertence of its bank employee for Article 1173 of
2. Moral damages of P50,000.00 is awarded to plaintiffs-appellees Arthur Canlas and the Civil Code only requires it to exercise the diligence of a good father of family.
Vivienne S. Canlas, not P50,000.00 each.

65
In Simex International (Manila), Inc. vs. Court of Appeals (183 SCRA 360, 367), this Court stressed
the fiduciary nature of the relationship between a bank and its depositors and the extent of
diligence expected of it in handling the accounts entrusted to its care.
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo, and as promptly as possible. This
has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as the dishonor of a check without good reason,
can cause the depositor not a little embarrassment if not also financial loss and perhaps even
civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. . . .
The bank is not expected to be infallible but, as correctly observed by respondent Appellate
Court, in this instance, it must bear the blame for not discovering the mistake of its teller despite
the established procedure requiring the papers and bank books to pass through a battery of
bank personnel whose duty it is to check and countercheck them for possible errors. Apparently,
the officials and employees tasked to do that did not perform their duties with due care, as may
be gathered from the testimony of the bank's lone witness, Antonio Enciso, who casually
declared that "the approving officer does not have to see the account numbers and all those
things. Those are very petty things for the approving manager to look into" (p. 78, Record on
Appeal). Unfortunately, it was a "petty thing," like the incorrect account number that the bank
teller wrote on the initial deposit slip for the newly-opened joint current account of the Canlas
spouses, that sparked this half-a-million-peso damage suit against the bank.
While the bank's negligence may not have been attended with malice and bad faith,
nevertheless, it caused serious anxiety, embarrassment and humiliation to the private
respondents for which they are entitled to recover reasonable moral damages (American
Express International, Inc. vs. IAC, 167 SCRA 209). The award of reasonable attorney's fees is
proper for the private respondents were compelled to litigate to protect their interest (Art.
2208, Civil Code). However, the absence of malice and bad faith renders the award of exemplary
damages improper (Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778).
WHEREFORE, the petition for review is granted. The appealed decision is MODIFIED by deleting
the award of exemplary damages to the private respondents. In all other respects, the decision
of the Intermediate Appellate Court, now Court of Appeals, is AFFIRMED. No costs. SO ORDERED.
G.R. No. L-68138 May 13, 1991
AGUSTIN Y. GO and THE CONSOLIDATED BANK AND TRUST CORPORATION (Solidbank),
petitioners,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and FLOVERTO JAZMIN, respondents.
FERNAN, C.J.:
The instant petition for review on certiorari questions the propriety of the respondent appellate
court's award of nominal damages and attorney's fees to private respondent whose name was
used by a syndicate in encashing two U.S. treasury checks at petitioner bank.
Floverto Jazmin is an American citizen and retired employee of the United States Federal
Government. He had been a visitor in the Philippines since 1972 residing at 34 Maravilla Street,
Mangatarem, Pangasinan. As pensionado of the U.S. government, he received annuity checks in
the amounts of $ 67.00 for disability and $ 620.00 for retirement through the Mangatarem post
office. He used to encash the checks at the Prudential Bank branch at Clark Air Base, Pampanga.
In January, 1975, Jazmin failed to receive one of the checks on time thus prompting him to
inquire from the post offices at Mangatarem and Dagupan City. As the result of his inquiries
proved unsatisfactory, on March 4, 1975, Jazmin wrote the U.S. Civil Service Commission,
Bureau of Retirement at Washington, D.C. complaining about the delay in receiving his check.
Thereafter, he received a substitute check which he encashed at the Prudential Bank at Clark Air
Base.
Meanwhile, on April 22, 1975, Agustin Go, in his capacity as branch manager of the then
Solidbank (which later became the Consolidated Bank and Trust Corporation) in Baguio City,
allowed a person named "Floverto Jazmin" to open Savings Account No. BG 5206 by depositing
two (2) U. S. treasury checks Nos. 5-449-076 and 5-448-890 in the respective amounts of
$1810.00 and $913.401 equivalent to the total amount of P 20,565.69, both payable to the order
of Floverto Jasmin of Maranilla St., Mangatarem, Pangasinan and drawn on the First National
City Bank, Manila.
The savings account was opened in the ordinary course of business. Thus, the bank, through its
manager Go, required the depositor to fill up the information sheet for new accounts to reflect
his personal circumstances. The depositor indicated therein that he was Floverto Jazmin with
mailing address at Mangatarem, Pangasinan and home address at Maravilla St., Mangatarem,
Pangasinan; that he was a Filipino citizen and a security officer of the US Army with the rank of
a sergeant bearing AFUS Car No. H-2711659; that he was married to Milagros Bautista; and that
66
his initial deposit was P3,565.35. He wrote CSA No. 138134 under remarks or instructions and
left blank the spaces under telephone number, residence certificate/alien certificate of
registration/passport, bank and trade performance and as to who introduced him to the bank.2
The depositor's signature specimens were also taken.
Thereafter, the deposited checks were sent to the drawee bank for clearance. Inasmuch as
Solidbank did not receive any word from the drawee bank, after three (3) weeks, it allowed the
depositor to withdraw the amount indicated in the checks.
On June 29, 1976 or more than a year later, the two dollar cheeks were returned to Solidbank
with the notation that the amounts were altered.3 Consequently, Go reported the matter to the
Philippine Constabulary in Baguio City.
On August 3, 1976, Jazmin received radio messages requiring him to appear before the
Philippine Constabulary headquarters in Benguet on September 7, 1976 for investigation
regarding the complaint filed by Go against him for estafa by passing altered dollar checks.
Initially, Jazmin was investigated by constabulary officers in Lingayen, Pangasinan and later, at
Camp Holmes, La Trinidad, Benguet. He was shown xerox copies of U.S. Government checks Nos.
5-449-076 and 5-448-890 payable to the order of Floverto Jasmin in the respective amounts of
$1,810.00 and $913.40. The latter amount was actually for only $13.40; while the records do
not show the unaltered amount of the other treasury check.
Jazmin denied that he was the person whose name appeared on the checks; that he received
the same and that the signature on the indorsement was his. He likewise denied that he opened
an account with Solidbank or that he deposited and encashed therein the said checks.
Eventually, the investigators found that the person named "Floverto Jazmin" who made the
deposit and withdrawal with Solidbank was an impostor.
On September 24, 1976, Jazmin filed with the then Court of First Instance of Pangasinan, Branch
II at Lingayen a complaint against Agustin Y. Go and the Consolidated Bank and Trust
Corporation for moral and exemplary damages in the total amount of P90,000 plus attorney's
fees of P5,000. He alleged therein that Go allowed the deposit of the dollar checks and the
withdrawal of their peso equivalent "without ascertaining the identity of the depositor
considering the highly suspicious circumstances under which said deposit was made; that
instead of taking steps to establish the correct identity of the depositor, Go "immediately and
recklessly filed (the) complaint for estafa through alteration of dollar check" against him; that
Go's complaint was "an act of vicious and wanton recklessness and clearly intended for no other
purpose than to harass and coerce the plaintiff into paying the peso equivalent of said dollar
checks to the CBTC branch office in Baguio City" so that Go would not be "disciplined by his
employer;" that by reason of said complaint, he was "compelled to present and submit himself"
to investigations by the constabulary authorities; and that he suffered humiliation and
embarrassment as a result of the filing of the complaint against him as well as "great
inconvenience" on account of his age (he was a septuagenarian) and the distance between his
residence and the constabulary headquarters. He averred that his peace of mind and mental
and emotional tranquility as a respected citizen of the community would not have suffered had
Go exercised "a little prudence" in ascertaining the identity of the depositor and, for the "grossly
negligent and reckless act" of its employee, the defendant CBTC should also be held
responsible.4
In their answer, the defendants contended that the plaintiff had no cause of action against them
because they acted in good faith in seeking the "investigative assistance" of the Philippine
Constabulary on the swindling operations against banks by a syndicate which specialized in the
theft, alteration and encashment of dollar checks. They contended that contrary to plaintiff s
allegations, they verified the signature of the depositor and their tellers conducted an Identity
check. As counterclaim, they prayed for the award of P100,000 as compensatory and moral
damages; P20,000 as exemplary damages; P20,000 as attorney's fees and P5,000 as litigation,
incidental expenses and costs.5
In its decision of March 27, 19786 the lower court found that Go was negligent in failing to
exercise "more care, caution and vigilance" in accepting the checks for deposit and encashment.
It noted that the checks were payable to the order of Floverto Jasmin, Maranilla St.,
Mangatarem, Pangasinan and not to Floverto Jazmin, Maravilla St., Mangatarem, Pangasinan
and that the differences in name and address should have put Go on guard. It held that more
care should have been exercised by Go in the encashment of the U.S. treasury checks as there
was no time limit for returning them for clearing unlike in ordinary checks wherein a two to
three-week limit is allowed.
Emphasizing that the main thrust of the complaint was "the failure of the defendants to take
steps to ascertain the identity of the depositor," the court noted that the depositor was allegedly
a security officer while the plaintiff was a retiree-pensioner. It considered as "reckless" the
defendants' filing of the complaint with the Philippine Constabulary noting that since the article
on a fake dollar check ring appeared on July 18, 1976 in the Baguio Midland Courier, it was only
on August 24, 1976 or more than a month after the bank had learned of the altered checks that
it filed the complaint and therefore, it had sufficient time to ascertain the identity of the
depositor.
The court also noted that instead of complying with the Central Bank Circular Letter of January
17, 1973 requesting all banking institutions to report to the Central Bank all crimes involving
their property within 48 hours from knowledge of the crime, the bank reported the matter to
the Philippine Constabulary.
67

Finding that the plaintiff had sufficiently shown that prejudice had been caused to him in the
form of mental anguish, moral shock and social humiliation on account of the defendants' gross
negligence, the court, invoking Articles 2176, 2217 and 2219 (10) in conjunction with Article 21
of the Civil Code, ruled in favor of the plaintiff. The dispositive portion of the decision states:
WHEREFORE, this Court finds for plaintiff and that he is entitled to the reliefs prayed for in the
following manner: Defendant Agustin Y. Co and the CONSOLIDATED BANK AND TRUST
CORPORATION are hereby ordered to pay, jointly and severally, to the plaintiff the amount of
SIX THOUSAND PESOS (P6,000.00) as moral damages; ONE THOUSAND PESOS (P1,000.00) as
attorney's fees and costs of litigation and to pay the costs and defendant AGUSTIN Y. Go in
addition thereto in his sole and personal capacity to pay the plaintiff the amount of THREE
THOUSAND PESOS (P3,000.00) as exemplary damages, all with interest at six (6) percent per
annum until fully paid.
SO ORDERED.
The defendants appealed to the Court of Appeals. On January 24, 1984, said court (then named
Intermediate Appellate Court) rendered a decision7 finding as evident negligence Go's failure to
notice the substantial difference in the identity of the depositor and the payee in the check,
concluded that Go's negligence in the performance of his duties was "the proximate cause why
appellant bank was swindled" and that denouncing the crime to the constabulary authorities
"merely aggravated the situation." It ruled that there was a cause of action against the
defendants although Jazmin had nothing to do with the alteration of the checks, because he
suffered damages due to the negligence of Go. Hence, under Article 2180 of the Civil Code, the
bank shall be held liable for its manager's negligence.
The appellate court, however, disallowed the award of moral and exemplary damages and
granted nominal damages instead. It explained thus:
While it is true that denouncing a crime is not negligence under which a claim for moral damages
is available, still appellants are liable under the law for nominal damages. The fact that appellee
did not suffer from any loss is of no moment for nominal damages are adjudicated in order that
a right of the plaintiff, which has been violated or invaded by the defendant, maybe vindicated
or recognized and not for the purpose of indemnifying the plaintiff for any loss suffered by him
(Article 2221, New Civil Code). These are damages recoverable where a legal right is technically
violated and must be vindicated against an invasion that has produced no actual present loss of
any kind, or where there has been a breach of contract and no substantial injury or actual
damages whatsoever have been or can be shown (Elgara vs. Sandijas, 27 Phil. 284). They are not
intended for indemnification of loss suffered but for the vindication or recognition of a right
violated or invaded (Ventanilla vs. Centeno, L-14333, January 28, 1961). And, where the plaintiff
as in the case at bar, the herein appellee has established a cause of action, but was not able to
adduce evidence showing actual damages then nominal damages may be recovered (Sia vs.
Espenilla CA-G.R. Nos. 45200-45201-R, April 21, 1975). Consequently, since appellee has no right
to claim for moral damages, then he may not likewise be entitled to exemplary damages (Estopa
vs. Piansay, No. L-14503, September 30, 1960). Considering that he had to defend himself in the
criminal charges filed against him, and that he was constrained to file the instant case, the
attorney's fees to be amended (sic) to plaintiff should be increased to P3,000.00.
Accordingly, the appellate court ordered Go and Consolidated Bank and Trust Corporation to
pay jointly and severally Floverto Jazmin only NOMINAL DAMAGES in the sum of Three Thousand
Pesos (P 3,000.00) with interest at six (6%) percent per annum until fully paid and One Thousand
Pesos (P 1,000.00) as attorney's fees and costs of litigation.
Go and the bank filed a motion for the reconsideration of said decision contending that in view
of the finding of the appellate court that "denouncing a crime is not negligence under which a
claim for moral damages is available," the award of nominal damages is unjustified as they did
not violate or invade Jazmin's rights. Corollarily, there being no negligence on the part of Go, his
employer may not be held liable for nominal damages.
The motion for reconsideration having been denied, Go and the bank interposed the instant
petition for review on certiorari arguing primarily that the employer bank may not be held "co-
equally liable" to pay nominal damages in the absence of proof that it was negligent in the
selection of and supervision over its employee.8
The facts of this case reveal that damages in the form of mental anguish, moral shock and social
humiliation were suffered by private respondent only after the filing of the petitioners'
complaint with the Philippine Constabulary. It was only then that he had to bear the
inconvenience of travelling to Benguet and Lingayen for the investigations as it was only then
that he was subjected to embarrassment for being a suspect in the unauthorized alteration of
the treasury checks. Hence, it is understandable why petitioners appear to have overlooked the
facts antecedent to the filing of the complaint to the constabulary authorities and to have put
undue emphasis on the appellate court's statement that "denouncing a crime is not negligence."
Although this Court has consistently held that there should be no penalty on the right to litigate
and that error alone in the filing of a case be it before the courts or the proper police authorities,
is not a ground for moral damages,9 we hold that under the peculiar circumstances of this case,
private respondent is entitled to an award of damages.
68
Indeed, it would be unjust to overlook the fact that petitioners' negligence was the root of all
the inconvenience and embarrassment experienced by the private respondent albeit they
happened after the filing of the complaint with the constabulary authorities. Petitioner Go's
negligence in fact led to the swindling of his employer. Had Go exercised the diligence expected
of him as a bank officer and employee, he would have noticed the glaring disparity between the
payee's name and address on the treasury checks involved and the name and address of the
depositor appearing in the bank's records. The situation would have been different if the
treasury checks were tampered with only as to their amounts because the alteration would have
been unnoticeable and hard to detect as the herein altered check bearing the amount of $
913.40 shows. But the error in the name and address of the payee was very patent and could
not have escaped the trained eyes of bank officers and employees. There is therefore, no other
conclusion than that the bank through its employees (including the tellers who allegedly
conducted an identification check on the depositor) was grossly negligent in handling the
business transaction herein involved.1wphi1
While at that stage of events private respondent was still out of the picture, it definitely was the
start of his consequent involvement as his name was illegally used in the illicit transaction. Again,
knowing that its viability depended on the confidence reposed upon it by the public, the bank
through its employees should have exercised the caution expected of it.
In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural
and probable consequences of the act or omission complained of. It is not necessary that such
damages have been foreseen or could have reasonably been foreseen by the defendant.10 As
Go's negligence was the root cause of the complained inconvenience, humiliation and
embarrassment, Go is liable to private respondents for damages.
Anent petitioner bank's claim that it is not "co-equally liable" with Go for damages, under the
fifth paragraph of Article 2180 of the Civil Code, "(E)mployers shall be liable for the damages
caused by their employees . . . acting within the scope of their assigned tasks." Pursuant to this
provision, the bank is responsible for the acts of its employee unless there is proof that it
exercised the diligence of a good father of a family to prevent the damage.11 Hence, the burden
of proof lies upon the bank and it cannot now disclaim liability in view of its own failure to prove
not only that it exercised due diligence to prevent damage but that it was not negligent in the
selection and supervision of its employees.
WHEREFORE, the decision of the respondent appellate court is hereby affirmed. Costs against
the petitioners.
SO ORDERED.
G.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R.
CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch
113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by
the Central Bank of the Philippines, and among its activities, accepts savings and time deposits.
Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-
Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the
latter authorized and allowed withdrawals of funds therefrom through the medium of special
withdrawal slips. These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh.
B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca
purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In
payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips
drawn upon the defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the defendant. This singular
circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special
withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on
such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca
other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and
delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon
the defendant, to wit:
DATE
69
WITHDRAWAL SLIP NO. However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips
No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for
AMOUNT P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a
consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80
June 15, 1978 representing the aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly
42127 attributable to defendant's gross negligence.

P1,198,092.80 On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for
the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's
July 15, 1978 claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorney's fees which amount are recoverable from the defendant.
42128
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the
940,190.00 transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant
is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were
Aug. 15, 1978 honored and treated as if it were checks, the truth being that when the special withdrawal slips
were received by defendant, it only verified whether or not the signatures therein were
42129 authentic, and whether or not the deposit level in the passbook concurred with the savings
ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated
880,000.00 the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for
being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein
Sep. 15, 1978 that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the
transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to
42130 notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it
is merely an extension of usual bank courtesy to a prospective client; that defendant is only
981,500.00 dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically
stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3
These were likewise deposited by plaintiff in its current account with Citibank and in turn the
Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay
of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the
slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October counterclaim of defendant.
1978. Because of the absence for a long period coupled with the fact that defendant honored
and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
belief was all the more strengthened that the other withdrawal slips were likewise sufficiently Development Bank was liable for damages under Article 21765 in relation to Articles 196 and
funded, and that it had received full value and payment of Fojas-Arca's credit purchased then 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the
outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca part of private respondent: 1) the acceptance and payment of the special withdrawal slips
further purchase on credit of its products as per agreement (Exh. "B"). without the presentation of the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal

70
slips the general appearance of checks; and 3) the failure of respondent bank to seasonably
warn petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the
appeal and affirmed the judgment of the trial court. According to the appellate court,
respondent bank notified the depositor to present the passbook whenever it received a
collection note from another bank, belying petitioner's claim that respondent bank was
negligent in not requiring a passbook under the subject transaction. The appellate court also
found that the special withdrawal slips in question were not purposely given the appearance of
checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks.
Lastly, the appellate court ruled that the respondent bank was under no obligation to inform
petitioner of the dishonor of the special withdrawal slips, for to do so would have been a
violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from
any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the
dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for
damages suffered by petitioner, due to its allegedly belated notice of non-payment of the
subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special
savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with
Citibank. The latter credited the same to petitioner's current account, then presented the slips
for payment to respondent bank. It was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127
and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by
respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came
about six months from the time Fojas-Arca purchased tires from petitioner using the subject
withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's
account, causing the alleged pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-
negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus,
respondent bank was under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were
not negotiable instruments. It could not expect these slips to be treated as checks by other
entities. Payment or notice of dishonor from respondent bank could not be expected
immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically credited
petitioner's current account with the amount of the subject withdrawal slips, then merely
waited for the same to be honored and paid by respondent bank. It presumed that the
withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the
withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money.12 The withdrawal
slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether
such account consists only of a few hundred pesos or of millions of pesos.13 The fact that the
other withdrawal slips were honored and paid by respondent bank was no license for Citibank
to presume that subsequent slips would be honored and paid immediately. By doing so, it failed
in its fiduciary duty to treat the accounts of its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account deposits are accepted
by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's
agent or representative, who indicates therein the current account number to which the deposit
is to be credited, the name of the depositor or current account holder, the date of the deposit,
and the amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks,
as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of
deposit. But having erroneously accepted them as such, Citibank and petitioner as account-
holder must bear the risks attendant to the acceptance of these instruments. Petitioner and
Citibank could not now shift the risk and hold private respondent liable for their admitted
mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
29546 is AFFIRMED. Costs against petitioner. SO ORDERED.
71
 G.R. No. 97626 March 14, 1997
PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et
al., petitioners,
vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its
President & General Manager, respondents.
HERMOSISIMA, JR., J.:
Challenged in this petition for review is the Decision dated February 28, 19911 rendered by
public respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of
the Regional Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil
Case No. 27288 entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce,
now absorbed by Philippine Commercial and Industrial Bank."
The case stemmed from a complaint filed by the private respondent Rommel's Marketing
Corporation (RMC for brevity), represented by its President and General Manager Romeo
Lipana, to recover from the former Philippine Bank of Commerce (PBC for brevity), now
absorbed by the Philippine Commercial International Bank, the sum of P304,979.74
representing various deposits it had made in its current account with said bank but which were
not credited to its account, and were instead deposited to the account of one Bienvenido Cotas,
allegedly due to the gross and inexcusable negligence of the petitioner bank.
RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-
01748-7, with the Pasig Branch of PBC in connection with its business of selling appliances.
In the ordinary and usual course of banking operations, current account deposits are accepted
by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's
agent or representative, who indicates therein the current account number to which the deposit
is to be credited, the name of the depositor or current account holder, the date of the deposit,
and the amount of the deposit either in cash or checks. The deposit slip has an upper portion or
stub, which is detached and given to the depositor or his agent; the lower portion is retained by
the bank. In some instances, however, the deposit slips are prepared in duplicate by the
depositor. The original of the deposit slip is retained by the bank, while the duplicate copy is
returned or given to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds
in the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of
depositing said funds in the current accounts of RMC with PBC. It turned out, however, that
these deposits, on all occasions, were not credited to RMC's account but were instead deposited
to Account No. 53-01734-7 of Yabut's husband, Bienvenido Cotas who likewise maintains an
account with the same bank. During this period, petitioner bank had, however, been regularly
furnishing private respondent with monthly statements showing its current accounts balances.
Unfortunately, it had never been the practice of Romeo Lipana to check these monthly
statements of account reposing complete trust and confidence on petitioner bank.
Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of
the deposit slip, an original and a duplicate. The original showed the name of her husband as
depositor and his current account number. On the duplicate copy was written the account
number of her husband but the name of the account holder was left blank. PBC's teller, Azucena
Mabayad, would, however, validate and stamp both the original and the duplicate of these
deposit slips retaining only the original copy despite the lack of information on the duplicate
slip. The second copy was kept by Irene Yabut allegedly for record purposes. After validation,
Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and
change the account number written thereon, which is that of her husband's, and make it appear
to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance records also
prepared by Ms. Yabut and submitted to private respondent RMC together with the validated
duplicate slips with the latter's name and account number, she made her company believe that
all the while the amounts she deposited were being credited to its account when, in truth and
in fact, they were being deposited by her and credited by the petitioner bank in the account of
Cotas. This went on in a span of more than one (1) year without private respondent's knowledge.
Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its
money, but as its demand went unheeded, it filed a collection suit before the Regional Trial
Court of Pasig, Branch 160. The trial court found petitioner bank negligent and ruled as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of Commerce,
now absorbed by defendant Philippine Commercial & Industrial Bank, and defendant Azucena
Mabayad to pay the plaintiff, jointly and severally, and without prejudice to any criminal action
which may be instituted if found warranted:
1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at the
legal rate from the filing of the complaint;
2. A sum equivalent to 14% thereof, as exemplary damages;
72
3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and
4. Costs.
Defendants' counterclaim is hereby dismissed for lack of merit.2
On appeal, the appellate court affirmed the foregoing decision with modifications, viz:
WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the awards of
exemplary damages and attorney's fees specified therein are eliminated and instead, appellants
are ordered to pay plaintiff, in addition to the principal sum of P304,979.74 representing
plaintiff's lost deposit plus legal interest thereon from the filing of the complaint, P25,000.00
attorney's fees and costs in the lower court as well as in this Court.3
Hence, this petition anchored on the following grounds:
1) The proximate cause of the loss is the negligence of respondent Rommel Marketing
Corporation and Romeo Lipana in entrusting cash to a dishonest employee.
2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's
statements of account with its own records during the entire period of more than one (1) year
is the proximate cause of the commission of subsequent frauds and misappropriation
committed by Ms. Irene Yabut.
3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing
Corporation are falsified and are not proof that the amounts appearing thereon were deposited
to respondent Rommel Marketing Corporation's account with the bank,
4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her
fraudulent acts against respondent Rommel Marketing Corporation, and not as records of
deposits she made with the bank.4
The petition has no merit.
Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the
tune of P304,979.74, suffered by the private respondent RMC petitioner bank's negligence
or that of private respondent's?
Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and
Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut.5
According to them, it was impossible for the bank to know that the money deposited by Ms.
Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will be
depositing cash to its account. Thus, it was impossible for the bank to know the fraudulent
design of Yabut considering that her husband, Bienvenido Cotas, also maintained an account
with the bank. For the bank to inquire into the ownership of the cash deposited by Ms. Irene
Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a
dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC.6
Private respondent, on the other hand, maintains that the proximate cause of the loss was the
negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips,
both original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact
that one of the deposit slips was not completely accomplished.
We sustain the private respondent.
Our law on quasi-delicts states:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must respond; and (c) the
connection of cause and effect between the fault or negligence of the defendant and the
damages incurred by the plaintiff.7
In the case at bench, there is no dispute as to the damage suffered by the private respondent
(plaintiff in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or
negligence which caused the damage where the parties point to each other as the culprit.
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing
of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old,
yet still relevant, case of Picart v. Smith,8 provides the test by which to determine the existence
of negligence in a particular case which may be stated as follows: Did the defendant in doing the
alleged negligent act use that reasonable care and caution which an ordinarily prudent person
would have used in the same situation? If not, then he is guilty of negligence. The law here in
effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet
paterfamilias of the Roman law. The existence of negligence in a given case is not determined
73
by reference to the personal judgment of the actor in the situation before him. The law considers A: The depositor's stub is connected with the deposit slip or the bank's copy. In a deposit
what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and slip, the upper portion is the depositor's stub and the lower portion is the bank's copy, and you
prudence and determines liability by that. can detach the bank's copy from the depositor's stub by tearing it sir.

Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent Q: Now what do you do upon presentment of the deposit slip by the depositor or the
in validating, officially stamping and signing all the deposit slips prepared and presented by Ms. depositor's authorized representative?
Yabut, despite the glaring fact that the duplicate copy was not completely accomplished
contrary to the self-imposed procedure of the bank with respect to the proper validation of A: We see to it that the deposit slip9 is properly accomplished and then we count the
deposit slips, original or duplicate, as testified to by Ms. Mabayad herself, thus: money and then we tally it with the deposit slip sir.

Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your important Q: Now is the depositor's stub which you issued to your clients validated?
duties and functions?
A: Yes, sir. 10 [Emphasis ours]
A: I accept current and savings deposits from depositors and encashments.
Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the
Q: Now in the handling of current account deposits of bank clients, could you tell us the duplicate slip was not compulsorily required by the bank in accepting deposits should not relieve
procedure you follow? the petitioner bank of responsibility. The odd circumstance alone that such duplicate copy
lacked one vital information that of the name of the account holder should have already
A: The client or depositor or the authorized representative prepares a deposit slip by filling put Ms. Mabayad on guard. Rather than readily validating the incomplete duplicate copy, she
up the deposit slip with the name, the account number, the date, the cash breakdown, if it is should have proceeded more cautiously by being more probing as to the true reason why the
deposited for cash, and the check number, the amount and then he signs the deposit slip. name of the account holder in the duplicate slip was left blank while that in the original was
filled up. She should not have been so naive in accepting hook, line and sinker the too shallow
Q: Now, how many deposit slips do you normally require in accomplishing current account excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her personal
deposit, Mrs. Mabayad? record, she would simply fill up the blank space later on. 11 A "reasonable man of ordinary
prudence" 12 would not have given credence to such explanation and would have insisted that
A: The bank requires only one copy of the deposit although some of our clients prepare the space left blank be filled up as a condition for validation. Unfortunately, this was not how
the deposit slip in duplicate. bank teller Mabayad proceeded thus resulting in huge losses to the private respondent.

Q: Now in accomplishing current account deposits from your clients, what do you issue to Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself
the depositor to evidence the deposit made? in its lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the
testimony of Mr. Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and
A: We issue or we give to the clients the depositor's stub as a receipt of the deposit. now its Vice-President, to the effect that, while he ordered the investigation of the incident, he
never came to know that blank deposit slips were validated in total disregard of the bank's
Q: And who prepares the deposit slip? validation procedures, viz:

A: The depositor or the authorized representative sir? Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the
deposit slips and they validated the same with the machine, the fact that those deposit slips
Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the deposit were unfilled up, is there any report similar to that?
slip?
A: No, it was not the cashier but the teller.

74

Q: The teller validated the blank deposit slip?
A: No it was not reported.
Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit
slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, sir. 13
Prescinding from the above, public respondent Court of Appeals aptly observed:
xxx xxx xxx
It was in fact only when he testified in this case in February, 1983, or after the lapse of more
than seven (7) years counted from the period when the funds in question were deposited in
plaintiff's accounts (May, 1975 to July, 1976) that bank manager Bonifacio admittedly became
aware of the practice of his teller Mabayad of validating blank deposit slips. Undoubtedly, this
is gross, wanton, and inexcusable negligence in the appellant bank's supervision of its
employees. 14
It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner
bank in the selection and supervision of its bank teller, which was the proximate cause of the
loss suffered by the private respondent, and not the latter's act of entrusting cash to a dishonest
employee, as insisted by the petitioners.
Proximate cause is determined on the facts of each case upon mixed considerations of logic,
common sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case
of Bank of the Phil. Islands v. Court of Appeals, 17 defines proximate cause as "that cause, which,
in natural and continuous sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred. . . ." In this case, absent the act
of Ms. Mabayad in negligently validating the incomplete duplicate copy of the deposit slip, Ms.
Irene Yabut would not have the facility with which to perpetrate her fraudulent scheme with
impunity. Apropos, once again, is the pronouncement made by the respondent appellate court,
to wit:
. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by
plaintiff, she would not have been able to deposit those funds in her husband's current account,
and then make plaintiff believe that it was in the latter's accounts wherein she had deposited
them, had it not been for bank teller Mabayad's aforesaid gross and reckless negligence. The
latter's negligence was thus the proximate, immediate and efficient cause that brought about
the loss claimed by plaintiff in this case, and the failure of plaintiff to discover the same soon
enough by failing to scrutinize the monthly statements of account being sent to it by appellant
bank could not have prevented the fraud and misappropriation which Irene Yabut had already
completed when she deposited plaintiff's money to the account of her husband instead of to
the latter's accounts. 18
Furthermore, under the doctrine of "last clear chance" (also referred to, at times as
"supervening negligence" or as "discovered peril"), petitioner bank was indeed the culpable
party. This doctrine, in essence, states that where both parties are negligent, but the negligent
act of one is appreciably later in time than that of the other, or when it is impossible to
determine whose fault or negligence should be attributed to the incident, the one who had the
last clear opportunity to avoid the impending harm and failed to do so is chargeable with the
consequences thereof. 19 Stated differently, the rule would also mean that an antecedent
negligence of a person does not preclude the recovery of damages for the supervening
negligence of, or bar a defense against liability sought by another, if the latter, who had the last
fair chance, could have avoided the impending harm by the exercise of due diligence. 20 Here,
assuming that private respondent RMC was negligent in entrusting cash to a dishonest
employee, thus providing the latter with the opportunity to defraud the company, as advanced
by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the last
clear opportunity to avert the injury incurred by its client, simply by faithfully observing their
self-imposed validation procedure.
At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in
dealing with their clients.
The New Civil Code provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows bad faith, the provisions of
articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required. (1104a)
75
In the case of banks, however, the degree of diligence required is more than that of a good company would have been alerted to the series of frauds being committed against RMC by its
father of a family. Considering the fiduciary nature of their relationship with their depositors, secretary. The damage would definitely not have ballooned to such an amount if only RMC,
banks are duty bound to treat the accounts of their clients with the highest degree of care. 21 particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This
omission by RMC amounts to contributory negligence which shall mitigate the damages that
As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the may be awarded to the private respondent 23 under Article 2179 of the New Civil Code, to wit:
depositor expects the bank to treat his account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The bank must record every single . . . When the plaintiff's own negligence was the immediate and proximate cause of his injury,
transaction accurately, down to the last centavo, and as promptly as possible. This has to be he cannot recover damages. But if his negligence was only contributory, the immediate and
done if the account is to reflect at any given time the amount of money the depositor can proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover
dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A damages, but the courts shall mitigate the damages to be awarded.
blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as
they are made, can cause the depositor not a little embarrassment if not financial loss and In view of this, we believe that the demands of substantial justice are satisfied by allocating the
perhaps even civil and criminal litigation. damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court,
except the award of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only
The point is that as a business affected with public interest and because of the nature of its the balance of 60% needs to be paid by the petitioners. The award of attorney's fees shall be
functions, the bank is under obligation to treat the accounts of its depositors with meticulous borne exclusively by the petitioners.
care, always having in mind the fiduciary nature of their relationship. In the case before us, it is
apparent that the petitioner bank was remiss in that duty and violated that relationship. WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the
amount of actual damages private respondent is entitled to by 40%. Petitioners may recover
Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's from Ms. Azucena Mabayad the amount they would pay the private respondent. Private
statements of account with its own records during the entire period of more than one (1) year respondent shall have recourse against Ms. Irene Yabut. In all other respects, the appellate
is the proximate cause of the commission of subsequent frauds and misappropriation court's decision is AFFIRMED.
committed by Ms. Irene Yabut.
Proportionate costs.
We do not agree.
SO ORDERED.
While it is true that had private respondent checked the monthly statements of account sent by
the petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be
used by the petitioners to escape liability. This omission on the part of the private respondent
does not change the fact that were it not for the wanton and reckless negligence of the
petitioners' employee in validating the incomplete duplicate deposit slips presented by Ms.
Irene Yabut, the loss would not have occurred. Considering, however, that the fraud was
committed in a span of more than one (1) year covering various deposits, common human
experience dictates that the same would not have been possible without any form of collusion
between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the performance
of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim
reimbursement from her for whatever they shall be ordered to pay in this case.

The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was
likewise negligent in not checking its monthly statements of account. Had it done so, the

76
 G.R. No. 94723 August 21, 1997
KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father and Natural Guardian,
and Spouses FEDERICO N. SALVACION, JR., and EVELINA E. SALVACION, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and GREG BARTELLI y
NORTHCOTT, respondents.
TORRES, JR., J.:
In our predisposition to discover the "original intent" of a statute, courts become the unfeeling
pillars of the status quo. Ligle do we realize that statutes or even constitutions are bundles of
compromises thrown our way by their framers. Unless we exercise vigilance, the statute may
already be out of tune and irrelevant to our day.
The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued restraining the
respondents from applying and enforcing Section 113 of Central Bank Circular No. 960;
b.) After hearing, judgment be rendered:
1.) Declaring the respective rights and duties of petitioners and respondents;
2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to the provisions of
the Constitution, hence void; because its provision that "Foreign currency deposits shall be
exempt from attachment, garnishment, or any other order or process of any court, legislative
body, government agency or any administrative body whatsoever
i.) has taken away the right of petitioners to have the bank deposit of defendant Greg
Bartelli y Northcott garnished to satisfy the judgment rendered in petitioners' favor in violation
of substantive due process guaranteed by the Constitution;
ii.) has given foreign currency depositors an undue favor or a class privilege in violation of
the equal protection clause of the Constitution;
iii.) has provided a safe haven for criminals like the herein respondent Greg Bartelli y
Northcott since criminals could escape civil liability for their wrongful acts by merely converting
their money to a foreign currency and depositing it in a foreign currency deposit account with
an authorized bank.
The antecedent facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner
Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli
detained Karen Salvacion for four days, or up to February 7, 1989 and was able to rape the child
once on February 4, and three times each day on February 5, 6, and 7, 1989. On February 7,
1989, after policemen and people living nearby, rescued Karen, Greg Bartelli was arrested and
detained at the Makati Municipal Jail. The policemen recovered from Bartelli the following
items: 1.) Dollar Check No. 368, Control No. 021000678-1166111303, US 3,903.20; 2.)
COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account China Banking Corp.,
US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash; 6.) Door Keys 6
pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant.
On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against Greg Bartelli,
Criminal Case No. 801 for Serious Illegal Detention and Criminal Cases Nos. 802, 803, 804, and
805 for four (4) counts of Rape. On the same day, petitioners filed with the Regional Trial Court
of Makati Civil Case No. 89-3214 for damages with preliminary attachment against Greg Bartelli.
On February 24, 1989, the day there was a scheduled hearing for Bartelli's petition for bail the
latter escaped from jail.
On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte Motion for the Issuance of
Warrant of Arrest and Hold Departure Order. Pending the arrest of the accused Greg Bartelli y
Northcott, the criminal cases were archived in an Order dated February 28, 1989.
Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22, 1989
granting the application of herein petitioners, for the issuance of the writ of preliminary
attachment. After petitioners gave Bond No. JCL (4) 1981 by FGU Insurance Corporation in the
amount of P100,000.00, a Writ of Preliminary Attachment was issued by the trial court on
February 28, 1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on China
Banking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff of Makati, China
Banking Corporation invoked Republic Act No. 1405 as its answer to the notice of garnishment
served on it. On March 15, 1989, Deputy Sheriff of Makati Armando de Guzman sent his reply
to China Banking Corporation saying that the garnishment did not violate the secrecy of bank
deposits since the disclosure is merely incidental to a garnishment properly and legally made by
virtue of a court order which has placed the subject deposits in custodia legis. In answer to this
77
letter of the Deputy Sheriff of Makati, China Banking Corporation, in a letter dated March 20,
1989, invoked Section 113 of Central Bank Circular No. 960 to the effect that the dollar deposits
or defendant Greg Bartelli are exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body,
whatsoever.
This prompted the counsel for petitioners to make an inquiry with the Central Bank in a letter
dated April 25, 1989 on whether Section 113 of CB Circular No. 960 has any exception or whether
said section has been repealed or amended since said section has rendered nugatory the
substantive right of the plaintiff to have the claim sought to be enforced by the civil action
secured by way of the writ of preliminary attachment as granted to the plaintiff under Rule 57
of the Revised Rules of Court. The Central Bank responded as follows:
May 26, 1989
Ms. Erlinda S. Carolino
12 Pres. Osmena Avenue
South Admiral Village
Paranaque, Metro Manila
Dear Ms. Carolino:
This is in reply to your letter dated April 25, 1989 regarding your inquiry on Section 113, CB
Circular No. 960 (1983).
The cited provision is absolute in application. It does not admit of any exception, nor has the
same been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the country's banking system
which would help in the development of the economy. There is no intention to render futile the
basic rights of a person as was suggested in your subject letter. The law may be harsh as some
perceive it, but it is still the law. Compliance is, therefore, enjoined.
Very truly yours,
(SGD) AGAPITO S. FAJARDO
Director1
Meanwhile, on April 10, 1989, the trial court granted petitioners' motion for leave to serve
summons by publication in the Civil Case No. 89-3214 entitled "Karen Salvacion, et al. vs. Greg
Bartelli y Northcott." Summons with the complaint was a published in the Manila Times once a
week for three consecutive weeks. Greg Bartelli failed to file his answer to the complaint and
was declared in default on August 7, 1989. After hearing the case ex-parte, the court rendered
judgment in favor of petitioners on March 29, 1990, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering
the latter:
1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral damages;
2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and Evelina E. Salvacion
the amount of P150,000.00 each or a total of P300,000.00 for both of them;
3. To pay plaintiffs exemplary damages of P100,000.00; and
4. To pay attorney's fees in an amount equivalent to 25% of the total amount of damages
herein awarded;
5. To pay litigation expenses of P10,000.00; plus
6. Costs of the suit.
SO ORDERED.
The heinous acts of respondent Greg Bartelli which gave rise to the award were related in
graphic detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the municipal jail of Makati but was able
to escape therefrom on February 24, 1989 as per report of the Jail Warden of Makati to the
Presiding Judge, Honorable Manuel M. Cosico of the Regional Trial Court of Makati, Branch 136,
where he was charged with four counts of Rape and Serious Illegal Detention (Crim. Cases Nos.
802 to 805). Accordingly, upon motion of plaintiffs, through counsel, summons was served upon
defendant by publication in the Manila Times, a newspaper of general circulation as attested by
the Advertising Manager of the Metro Media Times, Inc., the publisher of the said newspaper.
Defendant, however, failed to file his answer to the complaint despite the lapse of the period of
sixty (60) days from the last publication; hence, upon motion of the plaintiffs, through counsel,
defendant was declared in default and plaintiffs were authorized to present their evidence ex
parte.
78
In support of the complaint, plaintiffs presented as witnesses the minor Karen E. Salvacion, her
father, Federico N. Salvacion, Jr., a certain Joseph Aguilar and a certain Liberato Madulio, who
gave the following testimony:
Karen took her first year high school in St. Mary's Academy in Pasay City but has recently
transferred to Arellano University for her second year.
In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati Cinema Square, with
her friend Edna Tangile whiling away her free time. At about 3:30 p.m. while she was finishing
her snack on a concrete bench in front of Plaza Fair, an American approached her. She was then
alone because Edna Tangile had already left, and she was about to go home. (TSN, Aug. 15, 1989,
pp. 2 to 5)
The American asked her name and introduced himself as Greg Bartelli. He sat beside her when
he talked to her. He said he was a Math teacher and told her that he has a sister who is a nurse
in New York. His sister allegedly has a daughter who is about Karen's age and who was with him
in his house along Kalayaan Avenue. (TSN, Aug. 15, 1989, pp. 4-5)
The American asked Karen what was her favorite subject and she told him it's Pilipino. He then
invited her to go with him to his house where she could teach Pilipino to his niece. He even gave
her a stuffed toy to persuade her to teach his niece. (Id., pp. 5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to reach the defendant's house
along Kalayaan Avenue. (Id., p. 6)
When they reached the apartment house, Karen noticed that defendant's alleged niece was not
outside the house but defendant told her maybe his niece was inside. When Karen did not see
the alleged niece inside the house, defendant told her maybe his niece was upstairs, and invited
Karen to go upstairs. (Id., p. 7)
Upon entering the bedroom defendant suddenly locked the door. Karen became nervous
because his niece was not there. Defendant got a piece of cotton cord and tied Karen's hands
with it, and then he undressed her. Karen cried for help but defendant strangled her. He took a
packing tape and he covered her mouth with it and he circled it around her head. (Id., p. 7)
Then, defendant suddenly pushed Karen towards the bed which was just near the door. He tied
her feet and hands spread apart to the bed posts. He knelt in front of her and inserted his finger
in her sex organ. She felt severe pain. She tried to shout but no sound could come out because
there were tapes on her mouth. When defendant withdrew his finger it was full of blood and
Karen felt more pain after the withdrawal of the finger. (Id., p. 8)
He then got a Johnson's Baby Oil and he applied it to his sex organ as well as to her sex organ.
After that he forced his sex organ into her but he was not able to do so. While he was doing it,
Karen found it difficult to breathe and she perspired a lot while feeling severe pain. She merely
presumed that he was able to insert his sex organ a little, because she could not see. Karen could
not recall how long the defendant was in that position. (Id. pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also told Karen to take a shower
and he untied her hands. Karen could only hear the sound of the water while the defendant, she
presumed, was in the bathroom washing his sex organ. When she took a shower more blood
came out from her. In the meantime, defendant changed the mattress because it was full of
blood. After the shower, Karen was allowed by defendant to sleep. She fell asleep because she
got tired crying. The incident happened at about 4:00 p.m. Karen had no way of determining the
exact time because defendant removed her watch. Defendant did not care to give her food
before she went to sleep. Karen woke up at about 8:00 o'clock the following morning. (Id., pp.
9-10)
The following day, February 5, 1989, a Sunday, after a breakfast of biscuit and coke at about
8:30 to 9:00 a.m. defendant raped Karen while she was still bleeding. For lunch, they also took
biscuit and coke. She was raped for the second time at about 12:00 to 2:00 p.m. In the evening,
they had rice for dinner which defendant had stored downstairs; it was he who cooked the rice
that is why it looks like "lugaw". For the third time, Karen was raped again during the night.
During those three times defendant succeeded in inserting his sex organ but she could not say
whether the organ was inserted wholly.
Karen did not see any firearm or any bladed weapon. The defendant did not tie her hands and
feet nor put a tape on her mouth anymore but she did not cry for help for fear that she might
be killed; besides, all the windows and doors were closed. And even if she shouted for help,
nobody would hear her. She was so afraid that if somebody would hear her and would be able
to call the police, it was still possible that as she was still inside the house, defendant might kill
her. Besides, the defendant did not leave that Sunday, ruling out her chance to call for help. At
nighttime he slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times, once in the morning for thirty
minutes after a breakfast of biscuits; again in the afternoon; and again in the evening. At first,
Karen did not know that there was a window because everything was covered by a carpet, until
defendant opened the window for around fifteen minutes or less to let some air in, and she
found that the window was covered by styrofoam and plywood. After that, he again closed the
window with a hammer and he put the styrofoam, plywood, and carpet back. (Id., pp. 14-15)
79
That Monday evening, Karen had a chance to call for help, although defendant left but kept the
door closed. She went to the bathroom and saw a small window covered by styrofoam and she
also spotted a small hole. She stepped on the bowl and she cried for help through the hole. She
cried: "Maawa no po kayo so akin. Tulungan n'yo akong makalabas dito. Kinidnap ako!"
Somebody heard her. It was a woman, probably a neighbor, but she got angry and said she was
"istorbo". Karen pleaded for help and the woman told her to sleep and she will call the police.
She finally fell asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)
She woke up at 6:00 o'clock the following morning, and she saw defendant in bed, this time
sleeping. She waited for him to wake up. When he woke up, he again got some food but he
always kept the door locked. As usual, she was merely fed with biscuit and coke. On that day,
February 7, 1989, she was again raped three times. The first at about 6:30 to 7:00 a.m., the
second at about 8:30 9:00, and the third was after lunch at 12:00 noon. After he had raped
her for the second time he left but only for a short while. Upon his return, he caught her shouting
for help but he did not understand what she was shouting about. After she was raped the third
time, he left the house. (TSN, Aug. 15, 1989, pp. 16-17) She again went to the bathroom and
shouted for help. After shouting for about five minutes, she heard many voices. The voices were
asking for her name and she gave her name as Karen Salvacion. After a while, she heard a voice
of a woman saying they will just call the police. They were also telling her to change her clothes.
She went from the bathroom to the room but she did not change her clothes being afraid that
should the neighbors call for the police and the defendant see her in different clothes, he might
kill her. At that time she was wearing a T-shirt of the American because the latter washed her
dress. (Id., p. 16)
Afterwards, defendant arrived and he opened the door. He asked her if she had asked for help
because there were many policemen outside and she denied it. He told her to change her
clothes, and she did change to the one she was wearing on Saturday. He instructed her to tell
the police that she left home and willingly; then he went downstairs but he locked the door. She
could hear people conversing but she could not understand what they were saying. (Id., p. 19)
When she heard the voices of many people who were conversing downstairs, she knocked
repeatedly at the door as hard as she could. She heard somebody going upstairs and when the
door was opened, she saw a policeman. The policeman asked her name and the reason why she
was there. She told him she was kidnapped. Downstairs, he saw about five policemen in uniform
and the defendant was talking to them. "Nakikipag-areglo po sa mga pulis," Karen added. "The
policeman told him to just explain at the precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in front of the house. They rode
the car of a certain person she called Kuya Boy together with defendant, the policeman, and
two of her neighbors whom she called Kuya Bong Lacson and one Ate Nita. They were brought
to Sub-Station I and there she was investigated by a policeman. At about 2:00 a.m., her father
arrived, followed by her mother together with some of their neighbors. Then they were brought
to the second floor of the police headquarters. (Id., p. 21)
At the headquarters, she was asked several questions by the investigator. The written statement
she gave to the police was marked as Exhibit A. Then they proceeded to the National Bureau of
Investigation together with the investigator and her parents. At the NBI, a doctor, a medico-
legal officer, examined her private parts. It was already 3:00 in the early morning of the following
day when they reached the NBI. (TSN, Aug. 15, 1989, p. 22) The findings of the medico-legal
officer has been marked as Exhibit B.
She was studying at the St. Mary's Academy in Pasay City at the time of the incident but she
subsequently transferred to Apolinario Mabini, Arellano University, situated along Taft Avenue,
because she was ashamed to be the subject of conversation in the school. She first applied for
transfer to Jose Abad Santos, Arellano University along Taft Avenue near the Light Rail Transit
Station but she was denied admission after she told the school the true reason for her transfer.
The reason for their denial was that they might be implicated in the case. (TSN, Aug. 15, 1989,
p. 46)
xxx xxx xxx
After the incident, Karen has changed a lot. She does not play with her brother and sister
anymore, and she is always in a state of shock; she has been absent-minded and is ashamed
even to go out of the house. (TSN, Sept. 12, 1989, p. 10) She appears to be restless or sad, (Id.,
p. 11) The father prays for P500,000.00 moral damages for Karen for this shocking experience
which probably, she would always recall until she reaches old age, and he is not sure if she could
ever recover from this experience. (TSN, Sept. 24, 1989, pp. 10-11)
Pursuant to an Order granting leave to publish notice of decision, said notice was published in
the Manila Bulletin once a week for three consecutive weeks. After the lapse of fifteen (15) days
from the date of the last publication of the notice of judgment and the decision of the trial court
had become final, petitioners tried to execute on Bartelli's dollar deposit with China Banking
Corporation. Likewise, the bank invoked Section 113 of Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down to two:
May this Court entertain the instant petition despite the fact that original jurisdiction in petitions
for declaratory relief rests with the lower court? Should Section 113 of Central Bank Circular No.
80
960 and Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign
Currency Deposit Act be made applicable to a foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing
that "Foreign currency deposits shall be exempt from attachment, garnishment, or any other
order or process of any court, legislative body, government agency or any administrative body
whatsoever." should be adjudged as unconstitutional on the grounds that: 1.) it has taken away
the right of petitioners to have the bank deposit of defendant Greg Bartelli y Northcott
garnished to satisfy the judgment rendered in petitioners' favor in violation of substantive due
process guaranteed by the Constitution; 2.) it has given foreign currency depositors an undue
favor or a class privilege in violation of the equal protection clause of the Constitution; 3.) it has
provided a safe haven for criminals like the herein respondent Greg Bartelli y Northcott since
criminals could escape civil liability for their wrongful acts by merely converting their money to
a foreign currency and depositing it in a foreign currency deposit account with an authorized
bank; and 4.) The Monetary Board, in issuing Section 113 of Central Bank Circular No. 960 has
exceeded its delegated quasi-legislative power when it took away: a.) the plaintiffs substantive
right to have the claim sought to be enforced by the civil action secured by way of the writ of
preliminary attachment as granted by Rule 57 of the Revised Rules of Court; b.) the plaintiffs
substantive right to have the judgment credit satisfied by way of the writ of execution out of the
bank deposit of the judgment debtor as granted to the judgment creditor by Rule 39 of the
Revised Rules of Court, which is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that the Monetary Board
in issuing Section 113 of CB Circular No. 960 did not exceed its power or authority because the
subject Section is copied verbatim from a portion of R.A. No. 6426 as amended by P.D. 1246.
Hence, it was not the Monetary Board that grants exemption from attachment or garnishment
to foreign currency deposits, but the law (R.A. 6426 as amended) itself; that it does not violate
the substantive due process guaranteed by the Constitution because a.) it was based on a law;
b.) the law seems to be reasonable; c.) it is enforced according to regular methods of procedure;
and d.) it applies to all members of a class.
Expanding, the Central Bank said; that one reason for exempting the foreign currency deposits
from attachment, garnishment or any other order or process of any court, is to assure the
development and speedy growth of the Foreign Currency Deposit System and the Offshore
Banking System in the Philippines; that another reason is to encourage the inflow of foreign
currency deposits into the banking institutions thereby placing such institutions more in a
position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country; that the subject section is being
enforced according to the regular methods of procedure; and that it applies to all foreign
currency deposits made by any person and therefore does not violate the equal protection
clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is needed to promote the
public interest and the general welfare; that the State cannot just stand idly by while a
considerable segment of the society suffers from economic distress; that the State had to take
some measures to encourage economic development; and that in so doing persons and property
may be subjected to some kinds of restraints or burdens to secure the general welfare or public
interest. Respondent Central Bank also alleges that Rule 39 and Rule 57 of the Revised Rules of
Court provide that some properties are exempted from execution/attachment especially
provided by law and R.A. No. 6426 as amended is such a law, in that it specifically provides,
among others, that foreign currency deposits shall be exempted from attachment, garnishment,
or any other order or process of any court, legislative body, government agency or any
administrative body whatsoever.
For its part, respondent China Banking Corporation, aside from giving reasons similar to that of
respondent Central Bank, also stated that respondent China Bank is not unmindful of the
inhuman sufferings experienced by the minor Karen E. Salvacion from the beastly hands of Greg
Bartelli; that it is only too willing to release the dollar deposit of Bartelli which may perhaps
partly mitigate the sufferings petitioner has undergone; but it is restrained from doing so in view
of R.A. No. 6426 and Section 113 of Central Bank Circular No. 960; and that despite the harsh
effect of these laws on petitioners, CBC has no other alternative but to follow the same.
This Court finds the petition to be partly meritorious.
Petitioner deserves to receive the damages awarded to her by the court. But this petition for
declaratory relief can only be entertained and treated as a petition for mandamus to require
respondents to honor and comply with the writ of execution in Civil Case No. 89-3214.
This Court has no original and exclusive jurisdiction over a petition for declaratory relief.2
However, exceptions to this rule have been recognized. Thus, where the petition has far-
reaching implications and raises questions that should be resolved, it may be treated as one for
mandamus.3
Here is a child, a 12-year old girl, who in her belief that all Americans are good and in her gesture
of kindness by teaching his alleged niece the Filipino language as requested by the American,
trustingly went with said stranger to his apartment, and there she was raped by said American
tourist Greg Bartelli. Not once, but ten times. She was detained therein for four (4) days. This
American tourist was able to escape from the jail and avoid punishment. On the other hand, the
child, having received a favorable judgment in the Civil Case for damages in the amount of more
81
than P1,000,000.00, which amount could alleviate the humiliation, anxiety, and besmirched
reputation she had suffered and may continue to suffer for a long, long time; and knowing that
this person who had wronged her has the money, could not, however get the award of damages
because of this unreasonable law. This questioned law, therefore makes futile the favorable
judgment and award of damages that she and her parents fully deserve. As stated by the trial
court in its decision,
Indeed, after hearing the testimony of Karen, the Court believes that it was undoubtedly a
shocking and traumatic experience she had undergone which could haunt her mind for a long,
long time, the mere recall of which could make her feel so humiliated, as in fact she had been
actually humiliated once when she was refused admission at the Abad Santos High School,
Arellano University, where she sought to transfer from another school, simply because the
school authorities of the said High School learned about what happened to her and allegedly
feared that they might be implicated in the case.
xxx xxx xxx
The reason for imposing exemplary or corrective damages is due to the wanton and bestial
manner defendant had committed the acts of rape during a period of serious illegal detention
of his hapless victim, the minor Karen Salvacion whose only fault was in her being so naive and
credulous to believe easily that defendant, an American national, could not have such a bestial
desire on her nor capable of committing such a heinous crime. Being only 12 years old when
that unfortunate incident happened, she has never heard of an old Filipino adage that in every
forest there is a
snake, . . . .4
If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom
how the incentive for foreign currency deposit could be more important than his child's rights
to said award of damages; in this case, the victim's claim for damages from this alien who had
the gall to wrong a child of tender years of a country where he is a mere visitor. This further
illustrates the flaw in the questioned provisions.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's
economy was in a shambles; when foreign investments were minimal and presumably, this was
the reason why said statute was enacted. But the realities of the present times show that the
country has recovered economically; and even if not, the questioned law still denies those
entitled to due process of law for being unreasonable and oppressive. The intention of the
questioned law may be good when enacted. The law failed to anticipate the iniquitous effects
producing outright injustice and inequality such as the case before us.
It has thus been said that
But I also know,5 that laws and institutions must go hand in hand with the progress of the human
mind. As that becomes more developed, more enlightened, as new discoveries are made, new
truths are disclosed and manners and opinions change with the change of circumstances,
institutions must advance also, and keep pace with the times. . . We might as well require a man
to wear still the coat which fitted him when a boy, as civilized society to remain ever under the
regimen of their barbarous ancestors.
In his Comment, the Solicitor General correctly opined, thus:
The present petition has far-reaching implications on the right of a national to obtain redress
for a wrong committed by an alien who takes refuge under a law and regulation promulgated
for a purpose which does not contemplate the application thereof envisaged by the alien. More
specifically, the petition raises the question whether the protection against attachment,
garnishment or other court process accorded to foreign currency deposits by PD No. 1246 and
CB Circular No. 960 applies when the deposit does not come from a lender or investor but from
a mere transient or tourist who is not expected to maintain the deposit in the bank for long.
The resolution of this question is important for the protection of nationals who are victimized
in the forum by foreigners who are merely passing through.
xxx xxx xxx
. . . Respondents China Banking Corporation and Central Bank of the Philippines refused to honor
the writ of execution issued in Civil Case No. 89-3214 on the strength of the following provision
of Central Bank Circular No. 960:
Sec. 113. Exemption from attachment. Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
Central Bank Circular No. 960 was issued pursuant to Section 7 of Republic Act No. 6426:
Sec. 7. Rules and Regulations. The Monetary Board of the Central Bank shall promulgate such
rules and regulations as may be necessary to carry out the provisions of this Act which shall take
effect after the publication of such rules and regulations in the Official Gazette and in a
newspaper of national circulation for at least once a week for three consecutive weeks. In case
the Central Bank promulgates new rules and regulations decreasing the rights of depositors, the
rules and regulations at the time the deposit was made shall govern.
82

The aforecited Section 113 was copied from Section 8 of Republic Act NO. 6426, as amended by
P.D. 1246, thus:
Sec. 8. Secrecy of Foreign Currency Deposits. All foreign currency deposits authorized under
this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written permission of the depositor, in no
instance shall such foreign currency deposits be examined, inquired or looked into by any
person, government official, bureau or office whether judicial or administrative or legislative or
any other entity whether public or private: Provided, however, that said foreign currency
deposits shall be exempt from attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative body whatsoever.
The purpose of PD 1246 in according protection against attachment, garnishment and other
court process to foreign currency deposits is stated in its whereases, viz.:
WHEREAS, under Republic Act No. 6426, as amended by Presidential Decree No. 1035, certain
Philippine banking institutions and branches of foreign banks are authorized to accept deposits
in foreign currency;
WHEREAS, under the provisions of Presidential Decree No. 1034 authorizing the establishment
of an offshore banking system in the Philippines, offshore banking units are also authorized to
receive foreign currency deposits in certain cases;
WHEREAS, in order to assure the development and speedy growth of the Foreign Currency
Deposit System and the Offshore Banking System in the Philippines, certain incentives were
provided for under the two Systems such as confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest income of depositors who are nonresidents and
are not engaged in trade or business in the Philippines;
WHEREAS, making absolute the protective cloak of confidentiality over such foreign currency
deposits, exempting such deposits from tax, and guaranteeing the vested rights of depositors
would better encourage the inflow of foreign currency deposits into the banking institutions
authorized to accept such deposits in the Philippines thereby placing such institutions more in a
position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country;
Thus, one of the principal purposes of the protection accorded to foreign currency deposits is
"to assure the development and speedy growth of the Foreign Currency Deposit system and the
Offshore Banking in the Philippines" (3rd Whereas).
The Offshore Banking System was established by PD No. 1034. In turn, the purposes of PD No.
1034 are as follows:
WHEREAS, conditions conducive to the establishment of an offshore banking system, such as
political stability, a growing economy and adequate communication facilities, among others,
exist in the Philippines;
WHEREAS, it is in the interest of developing countries to have as wide access as possible to the
sources of capital funds for economic development;
WHEREAS, an offshore banking system based in the Philippines will be advantageous and
beneficial to the country by increasing our links with foreign lenders, facilitating the flow of
desired investments into the Philippines, creating employment opportunities and expertise in
international finance, and contributing to the national development effort.
WHEREAS, the geographical location, physical and human resources, and other positive factors
provide the Philippines with the clear potential to develop as another financial center in Asia;
On the other hand, the Foreign Currency Deposit system was created by PD. No. 1035. Its
purposes are as follows:
WHEREAS, the establishment of an offshore banking system in the Philippines has been
authorized under a separate decree;
WHEREAS, a number of local commercial banks, as depository bank under the Foreign Currency
Deposit Act (RA No. 6426), have the resources and managerial competence to more actively
engage in foreign exchange transactions and participate in the grant of foreign currency loans
to resident corporations and firms;
WHEREAS, it is timely to expand the foreign currency lending authority of the said depository
banks under RA 6426 and apply to their transactions the same taxes as would be applicable to
transaction of the proposed offshore banking units;
It is evident from the above [Whereas clauses] that the Offshore Banking System and the Foreign
Currency Deposit System were designed to draw deposits from foreign lenders and investors
83
(Vide second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these deposits that
are induced by the two laws and given protection and incentives by them.
Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit
encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said laws because
such depositor stays only for a few days in the country and, therefore, will maintain his deposit
in the bank only for a short time.
Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with
respondent China Banking Corporation only for safekeeping during his temporary stay in the
Philippines.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD No. 1246, insofar
as it amends Section 8 of R.A. No. 6426 are hereby held to be INAPPLICABLE to this case because
of its peculiar circumstances. Respondents are hereby REQUIRED to COMPLY with the writ of
execution issued in Civil Case No. 89-3214, "Karen Salvacion, et al. vs. Greg Bartelli y Northcott,
by Branch CXLIV, RTC Makati and to RELEASE to petitioners the dollar deposit of respondent
Greg Bartelli y Northcott in such amount as would satisfy the judgment.
SO ORDERED.

For the reasons stated above, the Solicitor General thus submits that the dollar deposit of
respondent Greg Bartelli is not entitled to the protection of Section 113 of Central Bank Circular
No. 960 and PD No. 1246 against attachment, garnishment or other court processes.6

In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that
the questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment,
garnishment, or any other order or process of any court, legislative body, government agency
or any administrative body whatsoever, is applicable to a foreign transient, injustice would
result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would
negate Article 10 of the New Civil Code which provides that "in case of doubt in the
interpretation or application of laws, it is presumed that the lawmaking body intended right and
justice to prevail. "Ninguno non deue enriquecerse tortizeramente con dano de otro." Simply
stated, when the statute is silent or ambiguous, this is one of those fundamental solutions that
would respond to the vehement urge of conscience. (Padilla vs. Padilla, 74 Phil. 377).

It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used
as a device by accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the
expense of the innocent.

Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding
the final and executory judgment of the lower court against the Central Bank Circular protecting
the foreign depositor? Shielding or protecting the dollar deposit of a transient alien depositor
against injustice to a national and victim of a crime? This situation calls for fairness against legal
tyranny.

We definitely cannot have both ways and rest in the belief that we have served the ends of
justice.

84
 G.R. No. L-34548 November 29, 1988
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
THE HONORABLE PACIFICO P. DE CASTRO and PHILIPPINE VIRGINIA TOBACCO
ADMINISTRATION, respondents
Meer, Meer & Meer for petitioner.
The Solicitor General for respondents.
CORTES, J.:
The crux of the instant controversy dwells on the liability of a bank for releasing its depositor's
funds upon orders of the court, pursuant to a writ of garnishment. If in compliance with the
court order, the bank delivered the garnished amount to the sheriff, who in turn delivered it to
the judgment creditor, but subsequently, the order of the court directing payment was set aside
by the same judge, should the bank be held solidarily liable with the judgment creditor to its
depositor for reimbursement of the garnished funds? The Court does not think so.
In Civil Case No. Q-12785 of the Court of First Instance of Rizal, Quezon City Branch IX entitled
"Badoc Planters, Inc. versus Philippine Virginia Tobacco Administration, et al.," which was an
action for recovery of unpaid tobacco deliveries, an Order (Partial Judgment) was issued on
January 15, 1970 by the Hon. Lourdes P. San Diego, then Presiding Judge, ordering the
defendants therein to pay jointly and severally, the plaintiff Badoc Planters, Inc. (hereinafter
referred to as "BADOC") within 48 hours the aggregate amount of P206,916.76, with legal
interests thereon.
On January 26,1970, BADOC filed an Urgent Ex-Parte Motion for a Writ of Execution of the said
Partial Judgment which was granted on the same day by the herein respondent judge who acted
in place of the Hon. Judge San Diego who had just been elevated as a Justice of the Court of
Appeals. Accordingly, the Branch Clerk of Court on the very same day, issued a Writ of Execution
addressed to Special Sheriff Faustino Rigor, who then issued a Notice of Garnishment addressed
to the General Manager and/or Cashier of Rizal Commercial Banking Corporation (hereinafter
referred to as RCBC), the petitioner in this case, requesting a reply within five (5) days to said
garnishment as to any property which the Philippine Virginia Tobacco Administration
(hereinafter referred to as "PVTA") might have in the possession or control of petitioner or of
any debts owing by the petitioner to said defendant. Upon receipt of such Notice, RCBC notified
PVTA thereof to enable the PVTA to take the necessary steps for the protection of its own
interest [Record on Appeal, p. 36]
Upon an Urgent Ex-Parte Motion dated January 27, 1970 filed by BADOC, the respondent Judge
issued an Order granting the Ex-Parte Motion and directing the herein petitioner "to deliver in
check the amount garnished to Sheriff Faustino Rigor and Sheriff Rigor in turn is ordered to cash
the check and deliver the amount to the plaintiff's representative and/or counsel on record."
[Record on Appeal, p. 20; Rollo, p. 5.] In compliance with said Order, petitioner delivered to
Sheriff Rigor a certified check in the sum of P 206,916.76.
Respondent PVTA filed a Motion for Reconsideration dated February 26,1970 which was granted
in an Order dated April 6,1970, setting aside the Orders of Execution and of Payment and the
Writ of Execution and ordering petitioner and BADOC "to restore, jointly and severally, the
account of PVTA with the said bank in the same condition and state it was before the issuance
of the aforesaid Orders by reimbursing the PVTA of the amount of P 206, 916.76 with interests
at the legal rate from January 27, 1970 until fully paid to the account of the PVTA This is without
prejudice to the right of plaintiff to move for the execution of the partial judgment pending
appeal in case the motion for reconsideration is denied and appeal is taken from the said partial
judgment." [Record on Appeal, p. 58]
The Motion for Reconsideration of the said Order of April 6, 1970 filed by herein petitioner was
denied in the Order of respondent judge dated June 10, 1970 and on June 19, 1970, which was
within the period for perfecting an appeal, the herein petitioner filed a Notice of Appeal to the
Court of Appeals from the said Orders.
This case was then certified by the Court of Appeals to this Honorable Court, involving as it does
purely questions of law.
The petitioner raises two principal queries in the instant case: 1) Whether or not PVTA funds are
public funds not subject to garnishment; and 2) Whether or not the respondent Judge correctly
ordered the herein petitioner to reimburse the amount paid to the Special Sheriff by virtue of
the execution issued pursuant to the Order/Partial Judgment dated January 15, 1970.
The record reveals that on February 2, 1970, private respondent PVTA filed a Motion for
Reconsideration of the Order/ Partial Judgment of January 15, 1970. This was granted and the
aforementioned Partial Judgment was set aside. The case was set for hearings on November 4,
9 and 11, 1970 [Rollo, pp. 205-207.] However, in view of the failure of plaintiff BADOC to appear
on the said dates, the lower court ordered the dismissal of the case against PVTA for failure to
prosecute [Rollo, p. 208.]
It must be noted that the Order of respondent Judge dated April 6, 1970 directing the plaintiff
to reimburse PVTA t e amount of P206,916.76 with interests became final as to said plaintiff
who failed to even file a motion for reconsideration, much less to appeal from the said Order.
85
Consequently, the order to restore the account of PVTA with RCBC in the same condition and
state it was before the issuance of the questioned orders must be upheld as to the plaintiff,
BADOC.
However, the questioned Order of April 6, 1970 must be set aside insofar as it ordered the
petitioner RCBC, jointly and severally with BADOC, to reimburse PVTA.
The petitioner merely obeyed a mandatory directive from the respondent Judge dated January
27, 1970, ordering petitioner 94 "to deliver in check the amount garnished to Sheriff Faustino
Rigor and Sheriff Rigor is in turn ordered to cash the check and deliver the amount to the
plaintiffs representative and/or counsel on record." [Record on Appeal, p. 20.]
PVTA however claims that the manner in which the bank complied with the Sheriffs Notice of
Garnishment indicated breach of trust and dereliction of duty on the part of the bank as
custodian of government funds. It insistently urges that the premature delivery of the garnished
amount by RCBC to the special sheriff even in the absence of a demand to deliver made by the
latter, before the expiration of the five-day period given to reply to the Notice of Garnishment,
without any reply having been given thereto nor any prior authorization from its depositor, PVTA
and even if the court's order of January 27, 1970 did not require the bank to immediately deliver
the garnished amount constitutes such lack of prudence as to make it answerable jointly and
severally with the plaintiff for the wrongful release of the money from the deposit of the PVTA.
The respondent Judge in his controverted Order sustained such contention and blamed RCBC
for the supposed "hasty release of the amount from the deposit of the PVTA without giving PVTA
a chance to take proper steps by informing it of the action being taken against its deposit,
thereby observing with prudence the five-day period given to it by the sheriff." [Rollo, p. 81.]
Such allegations must be rejected for lack of merit. In the first place, it should be pointed out
that RCBC did not deliver the amount on the strength solely of a Notice of Garnishment; rather,
the release of the funds was made pursuant to the aforesaid Order of January 27, 1970. While
the Notice of Garnishment dated January 26, 1970 contained no demand of payment as it was
a mere request for petitioner to withold any funds of the PVTA then in its possession, the Order
of January 27, 1970 categorically required the delivery in check of the amount garnished to the
special sheriff, Faustino Rigor.
In the second place, the bank had already filed a reply to the Notice of Garnishment stating that
it had in its custody funds belonging to the PVTA, which, in fact was the basis of the plaintiff in
filing a motion to secure delivery of the garnished amount to the sheriff. [See Rollo, p. 93.]
Lastly, the bank, upon the receipt of the Notice of Garnishment, duly informed PVTA thereof to
enable the latter to take the necessary steps for the protection of its own interest [Record on
Appeal, p. 36]
It is important to stress, at this juncture, that there was nothing irregular in the delivery of the
funds of PVTA by check to the sheriff, whose custody is equivalent to the custody of the court,
he being a court officer. The order of the court dated January 27, 1970 was composed of two
parts, requiring: 1) RCBC to deliver in check the amount garnished to the designated sheriff and
2) the sheriff in turn to cash the check and deliver the amount to the plaintiffs representative
and/or counsel on record. It must be noted that in delivering the garnished amount in check to
the sheriff, the RCBC did not thereby make any payment, for the law mandates that delivery of
a check does not produce the effect of payment until it has been cashed. [Article 1249, Civil
Code.]
Moreover, by virtue of the order of garnishment, the same was placed in custodia legis and
therefore, from that time on, RCBC was holding the funds subject to the orders of the court a
quo. That the sheriff, upon delivery of the check to him by RCBC encashed it and turned over
the proceeds thereof to the plaintiff was no longer the concern of RCBC as the responsibility
over the garnished funds passed to the court. Thus, no breach of trust or dereliction of duty can
be attributed to RCBC in delivering its depositor's funds pursuant to a court order which was
merely in the exercise of its power of control over such funds.
... The garnishment of property to satisfy a writ of execution operates as an attachment and
fastens upon the property a lien by which the property is brought under the jurisdiction of the
court issuing the writ. It is brought into custodia legis, under the sole control of such court [De
Leon v. Salvador, G.R. Nos. L-30871 and L-31603, December 28,1970, 36 SCRA 567, 574.]
The respondent judge however, censured the petitioner for having released the funds "simply
on the strength of the Order of the court which. far from ordering an immediate release of the
amount involved, merely serves as a standing authority to make the release at the proper time
as prescribed by the rules." [Rollo, p. 81.]
This argument deserves no serious consideration. As stated earlier, the order directing the bank
to deliver the amount to the sheriff was distinct and separate from the order directing the sheriff
to encash the said check. The bank had no choice but to comply with the order demanding
delivery of the garnished amount in check. The very tenor of the order called for immediate
compliance therewith. On the other hand, the bank cannot be held liable for the subsequent
encashment of the check as this was upon order of the court in the exercise of its power of
control over the funds placed in custodia legis by virtue of the garnishment.
86
In a recent decision [Engineering Construction Inc., v. National Power Corporation, G.R. No. L-
34589, June 29, 1988] penned by the now Chief Justice Marcelo Fernan, this Court absolved a
garnishee from any liability for prompt compliance with its order for the delivery of the
garnished funds. The rationale behind such ruling deserves emphasis in the present case:
But while partial restitution is warranted in favor of NPC, we find that the Appellate Court erred
in not absolving MERALCO, the garnishee, from its obligations to NPC with respect to the
payment of ECI of P 1,114,543.23, thus in effect subjecting MERALCO to double liability.
MERALCO should not have been faulted for its prompt obedience to a writ of garnishment.
Unless there are compelling reasons such as: a defect on the face of the writ or actual knowledge
on the part of the garnishee of lack of entitlement on the part of the garnisher, it is not
incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the
advance execution of a judgment is valid.
Section 8, Rule 57 of the Rules of Court provides:
Effect of attachment of debts and credits.All persons having in their possession or under their
control any credits or other similar personal property belonging to the party against whom
attachment is issued, or owing any debts to the same, all the time of service upon them of a
copy of the order of attachment and notice as provided in the last preceding section, shall be
liable to the applicant for the amount of such credits, debts or other property, until the
attachment be discharged, or any judgment recovered by him be satisfied, unless such property
be delivered or transferred, or such debts be paid, to the clerk, sheriff or other proper officer of
the court issuing the attachment.
Garnishment is considered as a specie of attachment for reaching credits belonging to the
judgment debtor and owing to him from a stranger to the litigation. Under the above-cited rule,
the garnishee [the third person] is obliged to deliver the credits, etc. to the proper officer issuing
the writ and "the law exempts from liability the person having in his possession or under his
control any credits or other personal property belonging to the defendant, ..., if such property
be delivered or transferred, ..., to the clerk, sheriff, or other officer of the court in which the
action is pending. [3 Moran, Comments on the Rules of Court 34 (1970 ed.)]
Applying the foregoing to the case at bar, MERALCO, as garnishee, after having been judicially
compelled to pay the amount of the judgment represented by funds in its possession belonging
to the judgment debtor or NPC, should be released from all responsibilities over such amount
after delivery thereof to the sheriff. The reason for the rule is self-evident. To expose garnishees
to risks for obeying court orders and processes would only undermine the administration of
justice. [Emphasis supplied.]
The aforequoted ruling thus bolsters RCBC's stand that its immediate compliance with the lower
court's order should not have been met with the harsh penalty of joint and several liability. Nor
can its liability to reimburse PVTA of the amount delivered in check be premised upon the
subsequent declaration of nullity of the order of delivery. As correctly pointed out by the
petitioner:
xxx xxx xxx
That the respondent Judge, after his Order was enforced, saw fit to recall said Order and decree
its nullity, should not prejudice one who dutifully abided by it, the presumption being that
judicial orders are valid and issued in the regular performance of the duties of the Court"
[Section 5(m) Rule 131, Revised Rules of Court]. This should operate with greater force in
relation to the herein petitioner which, not being a party in the case, was just called upon to
perform an act in accordance with a judicial flat. A contrary view will invite disrespect for the
majesty of the law and induce reluctance in complying with judicial orders out of fear that said
orders might be subsequently invalidated and thereby expose one to suffer some penalty or
prejudice for obeying the same. And this is what will happen were the controversial orders to
be sustained. We need not underscore the danger of this as a precedent.
xxx xxx xxx
[ Brief for the Petitioner, Rollo, p. 212; Emphasis supplied.]
From the foregoing, it may be concluded that the charge of breach of trust and/or dereliction of
duty as well as lack of prudence in effecting the immediate payment of the garnished amount is
totally unfounded. Upon receipt of the Notice of Garnishment, RCBC duly informed PVTA
thereof to enable the latter to take the necessary steps for its protection. However, right on the
very next day after its receipt of such notice, RCBC was already served with the Order requiring
delivery of the garnished amount. Confronted as it was with a mandatory directive,
disobedience to which exposed it to a contempt order, it had no choice but to comply.
The respondent Judge nevertheless held that the liability of RCBC for the reimbursement of the
garnished amount is predicated on the ruling of the Supreme Court in the case of Commissioner
of Public Highways v. Hon. San Diego [G.R. No. L-30098, February 18, 1970, 31 SCRA 616] which
he found practically on all fours with the case at bar.
The Court disagrees.
87
The said case which reiterated the rule in Republic v. Palacio [G.R. No. L-20322, May 29, 1968,
23 SCRA 899] that government funds and properties may not be seized under writs of execution
or garnishment to satisfy such judgment is definitely distinguishable from the case at bar.
In the Commissioner of Public Highways case [supra], the bank which precipitately allowed the
garnishment and delivery of the funds failed to inform its depositor thereof, charged as it was
with knowledge of the nullity of the writ of execution and notice of garnishment against
government funds. In the aforementioned case, the funds involved belonged to the Bureau of
Public Highways, which being an arm of the executive branch of the government, has no
personality of its own separate from the National Government. The funds involved were
government funds covered by the rule on exemption from execution.
This brings us to the first issue raised by the petitioner: Are the PVTA funds public funds exempt
from garnishment? The Court holds that they are not.
Republic Act No. 2265 created the PVTA as an ordinary corporation with all the attributes of a
corporate entity subject to the provisions of the Corporation Law. Hence, it possesses the power
"to sue and be sued" and "to acquire and hold such assets and incur such liabilities resulting
directly from operations authorized by the provisions of this Act or as essential to the proper
conduct of such operations." [Section 3, Republic Act No. 2265.]
Among the specific powers vested in the PVTA are: 1) to buy Virginia tobacco grown in the
Philippines for resale to local bona fide tobacco manufacturers and leaf tobacco dealers [Section
4(b), R.A. No. 2265]; 2) to contracts of any kind as may be necessary or incidental to the
attainment of its purpose with any person, firm or corporation, with the Government of the
Philippines or with any foreign government, subject to existing laws [Section 4(h), R.A. No.
22651; and 3) generally, to exercise all the powers of a corporation under the Corporation Law,
insofar as they are not inconsistent with the provisions of this Act [Section 4(k), R.A. No. 2265.]
From the foregoing, it is clear that PVTA has been endowed with a personality distinct and
separate from the government which owns and controls it. Accordingly, this Court has
heretofore declared that the funds of the PVTA can be garnished since "funds of public
corporation which can sue and be sued were not exempt from garnishment" [Philippine National
Bank v. Pabalan, G.R. No. L-33112, June 15, 1978, 83 SCRA 595, 598.]
In National Shipyards and Steel Corp. v. CIR [G.R. No. L-17874, August 31, 1964, 8 SCRA 781],
this Court held that the allegation to the effect that the funds of the NASSCO are public funds of
the government and that as such, the same may not be garnished, attached or levied upon is
untenable for, as a government-owned or controlled corporation, it has a personality of its own,
distinct and separate from that of the government. This court has likewise ruled that other
govemment-owned and controlled corporations like National Coal Company, the National
Waterworks and Sewerage Authority (NAWASA), the National Coconut Corporation (NACOCO)
the National Rice and Corn Corporation (NARIC) and the Price Stabilization Council (PRISCO)
which possess attributes similar to those of the PVTA are clothed with personalities of their own,
separate and distinct from that of the government [National Coal Company v. Collector of
Internal Revenue, 46 Phil. 583 (1924); Bacani and Matoto v. National Coconut Corporation et al.,
100 Phil. 471 (1956); Reotan v. National Rice & Corn Corporation, G.R. No. L-16223, February 27,
1962, 4 SCRA 418.] The rationale in vesting it with a separate personality is not difficult to find.
It is well-settled that when the government enters into commercial business, it abandons its
sovereign capacity and is to be treated like any other corporation [Manila Hotel Employees'
Association v. Manila Hotel Co. and CIR, 73 Phil. 734 (1941).]
Accordingly, as emphatically expressed by this Court in a 1978 decision, "garnishment was the
appropriate remedy for the prevailing party which could proceed against the funds of a
corporate entity even if owned or controlled by the government" inasmuch as "by engaging in
a particular business thru the instrumentality of a corporation, the government divests itself pro
hac vice of its sovereign character, so as to render the corporation subject to the rules of law
governing private corporations" [Philippine National Bank v. CIR, G.R No. L-32667, January 31,
1978, 81 SCRA 314, 319.]
Furthermore, in the case of PVTA, the law has expressly allowed it funds to answer for various
obligations, including the one sought to be enforced by plaintiff BADOC in this case (i.e. for
unpaid deliveries of tobacco). Republic Act No. 4155, which discounted the erstwhile support
given by the Central Bank to PVTA, established in lieu thereof a "Tobacco Fund" to be collected
from the proceeds of fifty per centum of the tariff or taxes of imported leaf tobacco and also
fifty per centum of the specific taxes on locally manufactured Virginia type cigarettes.
Section 5 of Republic Act No. 4155 provides that this fund shall be expended for the support or
payment of:
1. Indebtedness of the Philippine Virginia Tobacco Administration and the former
Agricultural Credit and Cooperative Financing Administration to FACOMAS and farmers and
planters regarding Virginia tobacco transactions in previous years;
2. Indebtedness of the Philippine Virginia Tobacco Administration and the former
Agricultural Credit and Cooperative Financing Administration to the Central Bank in gradual
amounts regarding Virginia tobacco transactions in previous years;
3. Continuation of the Philippine Virginia Tobacco Administration support and subsidy
operations including the purchase of locally grown and produced Virginia leaf tobacco, at the
88
present support and subsidy prices, its procurement, redrying, handling, warehousing and partial judgment rendered in favor of the plaintiff or of the processes issued in execution of such
disposal thereof, and the redrying plants trading within the purview of their contracts; judgment.

4. Operational, office and field expenses, and the establishment of the Tobacco Research
and Grading Institute. [Emphasis supplied.]
Inasmuch as the Tobacco Fund, a special fund, was by law, earmarked specifically to answer
obligations incurred by PVTA in connection with its proprietary and commercial operations
authorized under the law, it follows that said funds may be proceeded against by ordinary
judicial processes such as execution and garnishment. If such funds cannot be executed upon or
garnished pursuant to a judgment sustaining the liability of the PVTA to answer for its
obligations, then the purpose of the law in creating the PVTA would be defeated. For it was
declared to be a national policy, with respect to the local Virginia tobacco industry, to encourage
the production of local Virginia tobacco of the qualities needed and in quantities marketable in
both domestic and foreign markets, to establish this industry on an efficient and economic basis,
and to create a climate conducive to local cigarette manufacture of the qualities desired by the
consuming public, blending imported and native Virginia leaf tobacco to improve the quality of
locally manufactured cigarettes [Section 1, Republic Act No. 4155.]
RCBC cannot therefore be compelled to make restitution solidarily with the plaintiff BADOC.
Plaintiff BADOC alone was responsible for the issuance of the Writ of Execution and Order of
Payment and so, the plaintiff alone should bear the consequences of a subsequent annulment
of such court orders; hence, only the plaintiff can be ordered to restore the account of the PVTA.
WHEREFORE, the petition is hereby granted and the petitioner is ABSOLVED from any liability to
respondent PVTA for reimbursement of the funds garnished. The questioned Order of the
respondent Judge ordering the petitioner, jointly and severally with BADOC, to restore the
account of PVTA are modified accordingly.
SO ORDERED.

The Commissioner of Public Highways case is thus distinguishable from the case at bar. In said
case, the Philippine National Bank (PNB) as custodian of funds belonging to the Bureau of Public
Highways, an agency of the government, was chargeable with knowledge of the exemption of
such government funds from execution and garnishment pursuant to the elementary precept
that public funds cannot be disbursed without the appropriation required by law. On the other
hand, the same cannot hold true for RCBC as the funds entrusted to its custody, which belong
to a public corporation, are in the nature of private funds insofar as their susceptibility to
garnishment is concerned. Hence, RCBC cannot be charged with lack of prudence for
immediately complying with the order to deliver the garnished amount. Since the funds in its
custody are precisely meant for the payment of lawfully-incurred obligations, RCBC cannot
rightfully resist a court order to enforce payment of such obligations. That such court order
subsequently turned out to have been erroneously issued should not operate to the detriment
of one who complied with its clear order.

Finally, it is contended that RCBC was bound to inquire into the legality and propriety of the Writ
of Execution and Notice of Garnishment issued against the funds of the PVTA deposited with
said bank. But the bank was in no position to question the legality of the garnishment since it
was not even a party to the case. As correctly pointed out by the petitioner, it had neither the
personality nor the interest to assail or controvert the orders of respondent Judge. It had no
choice but to obey the same inasmuch as it had no standing at all to impugn the validity of the

89
 G.R. No. 168644 February 16, 2010
BSB GROUP, INC., represented by its President, Mr. RICARDO BANGAYAN, Petitioner,
vs.
SALLY GO a.k.a. SALLY GO-BANGAYAN, Respondent.
DECISION
PERALTA, J.:
This is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision of the
Court of Appeals in CA-G.R. SP No. 876001 dated April 20, 2005, which reversed and set aside
the September 13, 20042 and November 5, 20043 Orders issued by the Regional Trial Court of
Manila, Branch 364 in Criminal Case No. 02-202158 for qualified theft. The said orders, in turn,
respectively denied the motion filed by herein respondent Sally Go for the suppression of the
testimonial and documentary evidence relative to a Security Bank account, and denied
reconsideration.
The basic antecedents are no longer disputed.
Petitioner, the BSB Group, Inc., is a duly organized domestic corporation presided by its herein
representative, Ricardo Bangayan (Bangayan). Respondent Sally Go, alternatively referred to as
Sally Sia Go and Sally Go-Bangayan, is Bangayans wife, who was employed in the company as a
cashier, and was engaged, among others, to receive and account for the payments made by the
various customers of the company.
In 2002, Bangayan filed with the Manila Prosecutors Office a complaint for estafa and/or
qualified theft5 against respondent, alleging that several checks6 representing the aggregate
amount of 1,534,135.50 issued by the companys customers in payment of their obligation
were, instead of being turned over to the companys coffers, indorsed by respondent who
deposited the same to her personal banking account maintained at Security Bank and Trust
Company (Security Bank) in Divisoria, Manila Branch.7 Upon a finding that the evidence adduced
was uncontroverted, the assistant city prosecutor recommended the filing of the Information
for qualified theft against respondent.8
Accordingly, respondent was charged before the Regional Trial Court of Manila, Branch 36, in
an Information, the inculpatory portion of which reads:
That in or about or sometime during the period comprised (sic) between January 1988 [and]
October 1989, inclusive, in the City of Manila, Philippines, the said accused did then and there
willfully, unlawfully and feloniously with intent [to] gain and without the knowledge and consent
of the owner thereof, take, steal and carry away cash money in the total amount of
1,534,135.50 belonging to BSB GROUP OF COMPANIES represented by RICARDO BANGAYAN,
to the damage and prejudice of said owner in the aforesaid amount of 1,534,135.50, Philippine
currency.
That in the commission of the said offense, said accused acted with grave abuse of confidence,
being then employed as cashier by said complainant at the time of the commission of the said
offense and as such she was entrusted with the said amount of money.
Contrary to law.9
Respondent entered a negative plea when arraigned.10 The trial ensued. On the premise that
respondent had allegedly encashed the subject checks and deposited the corresponding
amounts thereof to her personal banking account, the prosecution moved for the issuance of
subpoena duces tecum /ad testificandum against the respective managers or records custodians
of Security Banks Divisoria Branch, as well as of the Asian Savings Bank (now Metropolitan Bank
& Trust Co. [Metrobank]), in Jose Abad Santos, Tondo, Manila Branch.11 The trial court granted
the motion and issued the corresponding subpoena.12
Respondent filed a motion to quash the subpoena dated November 4, 2003, addressed to
Metrobank, noting to the court that in the complaint-affidavit filed with the prosecutor, there
was no mention made of the said bank account, to which respondent, in addition to the Security
Bank account identified as Account No. 01-14-006, allegedly deposited the proceeds of the
supposed checks. Interestingly, while respondent characterized the Metrobank account as
irrelevant to the case, she, in the same motion, nevertheless waived her objection to the
irrelevancy of the Security Bank account mentioned in the same complaint-affidavit, inasmuch
as she was admittedly willing to address the allegations with respect thereto.13
Petitioner, opposing respondents move, argued for the relevancy of the Metrobank account on
the ground that the complaint-affidavit showed that there were two checks which respondent
allegedly deposited in an account with the said bank.14 To this, respondent filed a supplemental
motion to quash, invoking the absolutely confidential nature of the Metrobank account under
the provisions of Republic Act (R.A.) No. 1405.15 The trial court did not sustain respondent;
hence, it denied the motion to quash for lack of merit.16
Meanwhile, the prosecution was able to present in court the testimony of Elenita Marasigan
(Marasigan), the representative of Security Bank. In a nutshell, Marasigans testimony sought to
prove that between 1988 and 1989, respondent, while engaged as cashier at the BSB Group,
Inc., was able to run away with the checks issued to the company by its customers, endorse the
90
same, and credit the corresponding amounts to her personal deposit account with Security
Bank. In the course of the testimony, the subject checks were presented to Marasigan for
identification and marking as the same checks received by respondent, endorsed, and then
deposited in her personal account with Security Bank.17 But before the testimony could be
completed, respondent filed a Motion to Suppress,18 seeking the exclusion of Marasigans
testimony and accompanying documents thus far received, bearing on the subject Security Bank
account. This time respondent invokes, in addition to irrelevancy, the privilege of confidentiality
under R.A. No. 1405.
The trial court, nevertheless, denied the motion in its September 13, 2004 Order.19 A motion
for reconsideration was subsequently filed, but it was also denied in the Order dated November
5, 2004.20 These two orders are the subject of the instant case.
Aggrieved, and believing that the trial court gravely abused its discretion in acting the way it did,
respondent elevated the matter to the Court of Appeals via a petition for certiorari under Rule
65. Finding merit in the petition, the Court of Appeals reversed and set aside the assailed orders
of the trial court in its April 20, 2005 Decision.21 The decision reads:
WHEREFORE, the petition is hereby GRANTED. The assailed orders dated September 13, 2004
and November 5, 2004 are REVERSED and SET ASIDE. The testimony of the SBTC representative
is ordered stricken from the records.
SO ORDERED.22
With the denial of its motion for reconsideration,23 petitioner is now before the Court pleading
the same issues as those raised before the lower courts.
In this Petition24 under Rule 45, petitioner averred in the main that the Court of Appeals had
seriously erred in reversing the assailed orders of the trial court, and in effect striking out
Marasigans testimony dealing with respondents deposit account with Security Bank.25 It
asserted that apart from the fact that the said evidence had a direct relation to the subject
matter of the case for qualified theft and, hence, brings the case under one of the exceptions to
the coverage of confidentiality under R.A. 1405.26 Petitioner believed that what constituted the
subject matter in litigation was to be determined by the allegations in the information and, in
this respect, it alluded to the assailed November 5, 2004 Order of the trial court, which declared
to be erroneous the limitation of the present inquiry merely to what was contained in the
information.27
For her part, respondent claimed that the money represented by the Security Bank account was
neither relevant nor material to the case, because nothing in the criminal information suggested
that the money therein deposited was the subject matter of the case. She invited particular
attention to that portion of the criminal Information which averred that she has stolen and
carried away cash money in the total amount of 1,534,135.50. She advanced the notion that
the term "cash money" stated in the Information was not synonymous with the checks she was
purported to have stolen from petitioner and deposited in her personal banking account. Thus,
the checks which the prosecution had Marasigan identify, as well as the testimony itself of
Marasigan, should be suppressed by the trial court at least for violating respondents right to
due process.28 More in point, respondent opined that admitting the testimony of Marasigan,
as well as the evidence pertaining to the Security Bank account, would violate the secrecy rule
under R.A. No. 1405.29
In its reply, petitioner asserted the sufficiency of the allegations in the criminal Information for
qualified theft, as the same has sufficiently alleged the elements of the offense charged. It posits
that through Marasigans testimony, the Court would be able to establish that the checks
involved, copies of which were attached to the complaint-affidavit filed with the prosecutor,
had indeed been received by respondent as cashier, but were, thereafter, deposited by the
latter to her personal account with Security Bank. Petitioner held that the checks represented
the cash money stolen by respondent and, hence, the subject matter in this case is not only the
cash amount represented by the checks supposedly stolen by respondent, but also the checks
themselves.30
We derive from the conflicting advocacies of the parties that the issue for resolution is whether
the testimony of Marasigan and the accompanying documents are irrelevant to the case, and
whether they are also violative of the absolutely confidential nature of bank deposits and,
hence, excluded by operation of R.A. No. 1405. The question of admissibility of the evidence
thus comes to the fore. And the Court, after deliberative estimation, finds the subject evidence
to be indeed inadmissible.
Prefatorily, fundamental is the precept in all criminal prosecutions, that the constitutive acts of
the offense must be established with unwavering exactitude and moral certainty because this is
the critical and only requisite to a finding of guilt. 31 Theft is present when a person, with intent
to gain but without violence against or intimidation of persons or force upon things, takes the
personal property of another without the latters consent. It is qualified when, among others,
and as alleged in the instant case, it is committed with abuse of confidence.32 The prosecution
of this offense necessarily focuses on the existence of the following elements: (a) there was
taking of personal property belonging to another; (b) the taking was done with intent to gain;
(c) the taking was done without the consent of the owner; (d) the taking was done without
violence against or intimidation of persons or force upon things; and (e) it was done with abuse
of confidence.33 In turn, whether these elements concur in a way that overcomes the
91
presumption of guiltlessness, is a question that must pass the test of relevancy and competency
in accordance with Section 334 Rule 128 of the Rules of Court.
Thus, whether these pieces of evidence sought to be suppressed in this case the testimony of
Marasigan, as well as the checks purported to have been stolen and deposited in respondents
Security Bank account are relevant, is to be addressed by considering whether they have such
direct relation to the fact in issue as to induce belief in its existence or non-existence; or whether
they relate collaterally to a fact from which, by process of logic, an inference may be made as to
the existence or non-existence of the fact in issue.35
The fact in issue appears to be that respondent has taken away cash in the amount of
1,534,135.50 from the coffers of petitioner. In support of this allegation, petitioner seeks to
establish the existence of the elemental act of taking by adducing evidence that respondent, at
several times between 1988 and 1989, deposited some of its checks to her personal account
with Security Bank. Petitioner addresses the incongruence between the allegation of theft of
cash in the Information, on the one hand, and the evidence that respondent had first stolen the
checks and deposited the same in her banking account, on the other hand, by impressing upon
the Court that there obtains no difference between cash and check for purposes of prosecuting
respondent for theft of cash. Petitioner is mistaken.
In theft, the act of unlawful taking connotes deprivation of personal property of one by another
with intent to gain, and it is immaterial that the offender is able or unable to freely dispose of
the property stolen because the deprivation relative to the offended party has already ensued
from such act of execution.36 The allegation of theft of money, hence, necessitates that
evidence presented must have a tendency to prove that the offender has unlawfully taken
money belonging to another. Interestingly, petitioner has taken pains in attempting to draw a
connection between the evidence subject of the instant review, and the allegation of theft in
the Information by claiming that respondent had fraudulently deposited the checks in her own
name. But this line of argument works more prejudice than favor, because it in effect, seeks to
establish the commission, not of theft, but rather of some other crime probably estafa.
Moreover, that there is no difference between cash and check is true in other instances. In
estafa by conversion, for instance, whether the thing converted is cash or check, is immaterial
in relation to the formal allegation in an information for that offense; a check, after all, while
not regarded as legal tender, is normally accepted under commercial usage as a substitute for
cash, and the credit it represents in stated monetary value is properly capable of appropriation.
And it is in this respect that what the offender does with the check subsequent to the act of
unlawfully taking it becomes material inasmuch as this offense is a continuing one.37 In other
words, in pursuing a case for this offense, the prosecution may establish its cause by the
presentation of the checks involved. These checks would then constitute the best evidence to
establish their contents and to prove the elemental act of conversion in support of the
proposition that the offender has indeed indorsed the same in his own name.38
Theft, however, is not of such character. Thus, for our purposes, as the Information in this case
accuses respondent of having stolen cash, proof tending to establish that respondent has
actualized her criminal intent by indorsing the checks and depositing the proceeds thereof in
her personal account, becomes not only irrelevant but also immaterial and, on that score,
inadmissible in evidence.
We now address the issue of whether the admission of Marasigans testimony on the particulars
of respondents account with Security Bank, as well as of the corresponding evidence of the
checks allegedly deposited in said account, constitutes an unallowable inquiry under R.A. 1405.
It is conceded that while the fundamental law has not bothered with the triviality of specifically
addressing privacy rights relative to banking accounts, there, nevertheless, exists in our
jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right
of expectation is statutory, and it is found in R.A. No. 1405,39 otherwise known as the Bank
Secrecy Act of 1955. 40
R.A. No. 1405 has two allied purposes. It hopes to discourage private hoarding and at the same
time encourage the people to deposit their money in banking institutions, so that it may be
utilized by way of authorized loans and thereby assist in economic development.41 Owing to
this piece of legislation, the confidentiality of bank deposits remains to be a basic state policy in
the Philippines.42 Section 2 of the law institutionalized this policy by characterizing as absolutely
confidential in general all deposits of whatever nature with banks and other financial institutions
in the country. It declares:
Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the
litigation.1avvphi1
Subsequent statutory enactments43 have expanded the list of exceptions to this policy yet the
secrecy of bank deposits still lies as the general rule, falling as it does within the legally
92
recognized zones of privacy.44 There is, in fact, much disfavor to construing these primary and
supplemental exceptions in a manner that would authorize unbridled discretion, whether
governmental or otherwise, in utilizing these exceptions as authority for unwarranted inquiry
into bank accounts. It is then perceivable that the present legal order is obliged to conserve the
absolutely confidential nature of bank deposits.45
The measure of protection afforded by the law has been explained in China Banking Corporation
v. Ortega.46 That case principally addressed the issue of whether the prohibition against an
examination of bank deposits precludes garnishment in satisfaction of a judgment. Ruling on
that issue in the negative, the Court found guidance in the relevant portions of the legislative
deliberations on Senate Bill No. 351 and House Bill No. 3977, which later became the Bank
Secrecy Act, and it held that the absolute confidentiality rule in R.A. No. 1405 actually aims at
protection from unwarranted inquiry or investigation if the purpose of such inquiry or
investigation is merely to determine the existence and nature, as well as the amount of the
deposit in any given bank account. Thus,
x x x The lower court did not order an examination of or inquiry into the deposit of B&B Forest
Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to
inform the court whether or not the defendant B&B Forest Development Corporation had a
deposit in the China Banking Corporation only for purposes of the garnishment issued by it, so
that the bank would hold the same intact and not allow any withdrawal until further order. It
will be noted from the discussion of the conference committee report on Senate Bill No. 351
and House Bill No. 3977which later became Republic Act No. 1405, that it was not the intention
of the lawmakers to place banks deposits beyond the reach of execution to satisfy a final
judgmentThus:
x x x Mr. Marcos: Now, for purposes of the record, I should like the Chairman of the Committee
on Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held
liable by the Bureau of Internal Revenue [(BIR)] or, say, 1,000.00 worth of tax liability, and
because of this the deposit of this individual [has been] attached by the [BIR].
Mr. Ramos: The attachment will only apply after the court has pronounced sentence declaring
the liability of such person. But where the primary aim is to determine whether he has a bank
deposit in order to bring about a proper assessment by the [BIR], such inquiry is not allowed by
this proposed law.
Mr. Marcos: But under our rules of procedure and under the Civil Code, the attachment or
garnishment of money deposited is allowed. Let us assume for instance that there is a
preliminary attachment which is for garnishment or for holding liable all moneys deposited
belonging to a certain individual, but such attachment or garnishment will bring out into the
open the value of such deposit. Is that prohibited by... the law?
Mr. Ramos: It is only prohibited to the extent that the inquiry... is made only for the purpose of
satisfying a tax liability already declared for the protection of the right in favor of the
government; but when the object is merely to inquire whether he has a deposit or not for
purposes of taxation, then this is fully covered by the law. x x x
Mr. Marcos: The law prohibits a mere investigation into the existence and the amount of the
deposit.
Mr. Ramos: Into the very nature of such deposit. x x x47
In taking exclusion from the coverage of the confidentiality rule, petitioner in the instant case
posits that the account maintained by respondent with Security Bank contains the proceeds of
the checks that she has fraudulently appropriated to herself and, thus, falls under one of the
exceptions in Section 2 of R.A. No. 1405 that the money kept in said account is the subject
matter in litigation. To highlight this thesis, petitioner avers, citing Mathay v. Consolidated Bank
and Trust Co.,48 that the subject matter of the action refers to the physical facts; the things real
or personal; the money, lands, chattels and the like, in relation to which the suit is prosecuted,
which in the instant case should refer to the money deposited in the Security Bank account.49
On the surface, however, it seems that petitioners theory is valid to a point, yet a deeper
treatment tends to show that it has argued quite off-tangentially. This, because, while Mathay
did explain what the subject matter of an action is, it nevertheless did so only to determine
whether the class suit in that case was properly brought to the court.
What indeed constitutes the subject matter in litigation in relation to Section 2 of R.A. No. 1405
has been pointedly and amply addressed in Union Bank of the Philippines v. Court of Appeals,50
in which the Court noted that the inquiry into bank deposits allowable under R.A. No. 1405 must
be premised on the fact that the money deposited in the account is itself the subject of the
action.51 Given this perspective, we deduce that the subject matter of the action in the case at
bar is to be determined from the indictment that charges respondent with the offense, and not
from the evidence sought by the prosecution to be admitted into the records. In the criminal
Information filed with the trial court, respondent, unqualifiedly and in plain language, is charged
with qualified theft by abusing petitioners trust and confidence and stealing cash in the amount
of 1,534,135.50. The said Information makes no factual allegation that in some material way
involves the checks subject of the testimonial and documentary evidence sought to be
suppressed. Neither do the allegations in said Information make mention of the supposed bank
account in which the funds represented by the checks have allegedly been kept.
93
In other words, it can hardly be inferred from the indictment itself that the Security Bank
account is the ostensible subject of the prosecutions inquiry. Without needlessly expanding the
scope of what is plainly alleged in the Information, the subject matter of the action in this case
is the money amounting to 1,534,135.50 alleged to have been stolen by respondent, and not
the money equivalent of the checks which are sought to be admitted in evidence. Thus, it is that,
which the prosecution is bound to prove with its evidence, and no other.
It comes clear that the admission of testimonial and documentary evidence relative to
respondents Security Bank account serves no other purpose than to establish the existence of
such account, its nature and the amount kept in it. It constitutes an attempt by the prosecution
at an impermissible inquiry into a bank deposit account the privacy and confidentiality of which
is protected by law. On this score alone, the objection posed by respondent in her motion to
suppress should have indeed put an end to the controversy at the very first instance it was raised
before the trial court.
In sum, we hold that the testimony of Marasigan on the particulars of respondents supposed
bank account with Security Bank and the documentary evidence represented by the checks
adduced in support thereof, are not only incompetent for being excluded by operation of R.A.
No. 1405. They are likewise irrelevant to the case, inasmuch as they do not appear to have any
logical and reasonable connection to the prosecution of respondent for qualified theft. We find
full merit in and affirm respondents objection to the evidence of the prosecution. The Court of
Appeals was, therefore, correct in reversing the assailed orders of the trial court.
A final note. In any given jurisdiction where the right of privacy extends its scope to include an
individuals financial privacy rights and personal financial matters, there is an intermediate or
heightened scrutiny given by courts and legislators to laws infringing such rights.52 Should there
be doubts in upholding the absolutely confidential nature of bank deposits against affirming the
authority to inquire into such accounts, then such doubts must be resolved in favor of the
former. This attitude persists unless congress lifts its finger to reverse the general state policy
respecting the absolutely confidential nature of bank deposits.53
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No.
87600 dated April 20, 2005, reversing the September 13, 2004 and November 5, 2004 Orders of
the Regional Trial Court of Manila, Branch 36 in Criminal Case No. 02-202158, is AFFIRMED.
SO ORDERED.
G.R. Nos. 157294-95 November 30, 2006
JOSEPH VICTOR G. EJERCITO, Petitioner,
vs.
SANDIGANBAYAN (Special Division) and PEOPLE OF THE PHILIPPINES, Respondents.
DECISION
CARPIO MORALES, J.:
The present petition for certiorari under Rule 65 assails the Sandiganbayan Resolutions dated
February 7 and 12, 2003 denying petitioner Joseph Victor G. Ejercitos Motions to Quash
Subpoenas Duces Tecum/Ad Testificandum, and Resolution dated March 11, 2003 denying his
Motion for Reconsideration of the first two resolutions.
The three resolutions were issued in Criminal Case No. 26558, "People of the Philippines v.
Joseph Ejercito Estrada, et al.," for plunder, defined and penalized in R.A. 7080, "AN ACT
DEFINING AND PENALIZING THE CRIME OF PLUNDER."
In above-stated case of People v. Estrada, et al., the Special Prosecution Panel1 filed on January
20, 2003 before the Sandiganbayan a Request for Issuance of Subpoena Duces Tecum for the
issuance of a subpoena directing the President of Export and Industry Bank (EIB, formerly Urban
Bank) or his/her authorized representative to produce the following documents during the
hearings scheduled on January 22 and 27, 2003:
I. For Trust Account No. 858;
1. Account Opening Documents;
2. Trading Order No. 020385 dated January 29, 1999;
3. Confirmation Advice TA 858;
4. Original/Microfilm copies, including the dorsal side, of the following:
a. Bank of Commerce MC # 0256254 in the amount of 2,000,000.00;
94
b. Urban bank Corp. MC # 34181 dated November 8, 1999 in the amount of P10,875,749.43;
c. Urban Bank MC # 34182 dated November 8, 1999 in the amount of 42,716,554.22;
d. Urban Bank Corp. MC # 37661 dated November 23, 1999 in the amount of 54,161,496.52;
5. Trust Agreement dated January 1999:
Trustee: Joseph Victor C. Ejercito
Nominee: URBAN BANK-TRUST DEPARTMENT
Special Private Account No. (SPAN) 858; and
6. Ledger of the SPAN # 858.
II. For Savings Account No. 0116-17345-9
SPAN No. 858
1. Signature Cards; and
2. Statement of Account/Ledger
III. Urban Bank Managers Check and their corresponding Urban Bank Managers Check
Application Forms, as follows:
1. MC # 039975 dated January 18, 2000 in the amount of 70,000,000.00;
2. MC # 039976 dated January 18, 2000 in the amount of 2,000,000.00;
3. MC # 039977 dated January 18, 2000 in the amount of 2,000,000.00;
4. MC # 039978 dated January 18, 2000 in the amount of 1,000,000.00;
The Special Prosecution Panel also filed on January 20, 2003, a Request for Issuance of Subpoena
Duces Tecum/Ad Testificandum directed to the authorized representative of Equitable-PCI Bank
to produce statements of account pertaining to certain accounts in the name of "Jose Velarde"
and to testify thereon.
The Sandiganbayan granted both requests by Resolution of January 21, 2003 and subpoenas
were accordingly issued.
The Special Prosecution Panel filed still another Request for Issuance of Subpoena Duces
Tecum/Ad Testificandum dated January 23, 2003 for the President of EIB or his/her authorized
representative to produce the same documents subject of the Subpoena Duces Tecum dated
January 21, 2003 and to testify thereon on the hearings scheduled on January 27 and 29, 2003
and subsequent dates until completion of the testimony. The request was likewise granted by
the Sandiganbayan. A Subpoena Duces Tecum/Ad Testificandum was accordingly issued on
January 24, 2003.
Petitioner, claiming to have learned from the media that the Special Prosecution Panel had
requested for the issuance of subpoenas for the examination of bank accounts belonging to him,
attended the hearing of the case on January 27, 2003 and filed before the Sandiganbayan a
letter of even date expressing his concerns as follows, quoted verbatim:
Your Honors:
It is with much respect that I write this court relative to the concern of subpoenaing the
undersigneds bank account which I have learned through the media.
I am sure the prosecution is aware of our banking secrecy laws everyone supposed to observe.
But, instead of prosecuting those who may have breached such laws, it seems it is even going to
use supposed evidence which I have reason to believe could only have been illegally obtained.
The prosecution was not content with a general request. It even lists and identifies specific
documents meaning someone else in the bank illegally released confidential information.
If this can be done to me, it can happen to anyone. Not that anything can still shock our family.
Nor that I have anything to hide. Your Honors.
But, I am not a lawyer and need time to consult one on a situation that affects every bank
depositor in the country and should interest the bank itself, the Bangko Sentral ng Pilipinas, and
maybe the Ombudsman himself, who may want to investigate, not exploit, the serious breach
that can only harm the economy, a consequence that may have been overlooked. There appears
to have been deplorable connivance.
xxxx
95
I hope and pray, Your Honors, that I will be given time to retain the services of a lawyer to help
me protect my rights and those of every banking depositor. But the one I have in mind is out of
the country right now.
May I, therefore, ask your Honors, that in the meantime, the issuance of the subpoena be held
in abeyance for at least ten (10) days to enable me to take appropriate legal steps in connection
with the prosecutions request for the issuance of subpoena concerning my accounts. (Emphasis
supplied)
From the present petition, it is gathered that the "accounts" referred to by petitioner in his
above-quoted letter are Trust Account No. 858 and Savings Account No. 0116-17345-9.2
In open court, the Special Division of the Sandiganbayan, through Associate Justice Edilberto
Sandoval, advised petitioner that his remedy was to file a motion to quash, for which he was
given up to 12:00 noon the following day, January 28, 2003.
Petitioner, unassisted by counsel, thus filed on January 28, 2003 a Motion to Quash Subpoena
Duces Tecum/Ad Testificandum praying that the subpoenas previously issued to the President
of the EIB dated January 21 and January 24, 2003 be quashed.3
In his Motion to Quash, petitioner claimed that his bank accounts are covered by R.A. No. 1405
(The Secrecy of Bank Deposits Law) and do not fall under any of the exceptions stated therein.
He further claimed that the specific identification of documents in the questioned subpoenas,
including details on dates and amounts, could only have been made possible by an earlier illegal
disclosure thereof by the EIB and the Philippine Deposit Insurance Corporation (PDIC) in its
capacity as receiver of the then Urban Bank.
The disclosure being illegal, petitioner concluded, the prosecution in the case may not be
allowed to make use of the information.
Before the Motion to Quash was resolved by the Sandiganbayan, the prosecution filed another
Request for the Issuance of Subpoena Duces Tecum/Ad Testificandum dated January 31, 2003,
again to direct the President of the EIB to produce, on the hearings scheduled on February 3 and
5, 2003, the same documents subject of the January 21 and 24, 2003 subpoenas with the
exception of the Bank of Commerce MC #0256254 in the amount of 2,000,000 as Bank of
Commerce MC #0256256 in the amount of 200,000,000 was instead requested. Moreover, the
request covered the following additional documents:
IV. For Savings Account No. 1701-00646-1:
1. Account Opening Forms;
2. Specimen Signature Card/s; and
3. Statements of Account.
The prosecution also filed a Request for the Issuance of Subpoena Duces Tecum/Ad
Testificandum bearing the same date, January 31, 2003, directed to Aurora C. Baldoz, Vice
President-CR-II of the PDIC for her to produce the following documents on the scheduled
hearings on February 3 and 5, 2003:
1. Letter of authority dated November 23, 1999 re: SPAN [Special Private Account Number] 858;
2. Letter of authority dated January 29, 2000 re: SPAN 858;
3. Letter of authority dated April 24, 2000 re: SPAN 858;
4. Urban Bank check no. 052092 dated April 24, 2000 for the amount of P36, 572, 315.43;
5. Urban Bank check no. 052093 dated April 24, 2000 for the amount of P107,191,780.85; and
6. Signature Card Savings Account No. 0116-17345-9. (Underscoring supplied)
The subpoenas prayed for in both requests were issued by the Sandiganbayan on January 31,
2003.
On February 7, 2003, petitioner, this time assisted by counsel, filed an Urgent Motion to Quash
Subpoenae Duces Tecum/Ad Testificandum praying that the subpoena dated January 31, 2003
directed to Aurora Baldoz be quashed for the same reasons which he cited in the Motion to
Quash4 he had earlier filed.
On the same day, February 7, 2003, the Sandiganbayan issued a Resolution denying petitioners
Motion to Quash Subpoenae Duces Tecum/Ad Testificandum dated January 28, 2003.
Subsequently or on February 12, 2003, the Sandiganbayan issued a Resolution denying
petitioners Urgent Motion to Quash Subpoena Duces Tecum/Ad Testificandum dated February
7, 2003.
96
Petitioners Motion for Reconsideration dated February 24, 2003 seeking a reconsideration of
the Resolutions of February 7 and 12, 2003 having been denied by Resolution of March 11, 2003,
petitioner filed the present petition.
Raised as issues are:
1. Whether petitioners Trust Account No. 858 is covered by the term "deposit" as used in R.A.
1405;
2. Whether petitioners Trust Account No. 858 and Savings Account No. 0116-17345-9 are
excepted from the protection of R.A. 1405; and
3. Whether the "extremely-detailed" information contained in the Special Prosecution Panels
requests for subpoena was obtained through a prior illegal disclosure of petitioners bank
accounts, in violation of the "fruit of the poisonous tree" doctrine.
Respondent People posits that Trust Account No. 8585 may be inquired into, not merely because
it falls under the exceptions to the coverage of R.A. 1405, but because it is not even
contemplated therein. For, to respondent People, the law applies only to "deposits" which
strictly means the money delivered to the bank by which a creditor-debtor relationship is
created between the depositor and the bank.
The contention that trust accounts are not covered by the term "deposits," as used in R.A. 1405,
by the mere fact that they do not entail a creditor-debtor relationship between the trustor and
the bank, does not lie. An examination of the law shows that the term "deposits" used therein
is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor
relationship between the depositor and the bank.
The policy behind the law is laid down in Section 1:
SECTION 1. It is hereby declared to be the policy of the Government to give encouragement to
the people to deposit their money in banking institutions and to discourage private hoarding so
that the same may be properly utilized by banks in authorized loans to assist in the economic
development of the country. (Underscoring supplied)
If the money deposited under an account may be used by banks for authorized loans to third
persons, then such account, regardless of whether it creates a creditor-debtor relationship
between the depositor and the bank, falls under the category of accounts which the law
precisely seeks to protect for the purpose of boosting the economic development of the country.
Trust Account No. 858 is, without doubt, one such account. The Trust Agreement between
petitioner and Urban Bank provides that the trust account covers "deposit, placement or
investment of funds" by Urban Bank for and in behalf of petitioner.6 The money deposited under
Trust Account No. 858, was, therefore, intended not merely to remain with the bank but to be
invested by it elsewhere. To hold that this type of account is not protected by R.A. 1405 would
encourage private hoarding of funds that could otherwise be invested by banks in other
ventures, contrary to the policy behind the law.
Section 2 of the same law in fact even more clearly shows that the term "deposits" was intended
to be understood broadly:
SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the litigation.
(Emphasis and underscoring supplied)
The phrase "of whatever nature" proscribes any restrictive interpretation of "deposits."
Moreover, it is clear from the immediately quoted provision that, generally, the law applies not
only to money which is deposited but also to those which are invested. This further shows that
the law was not intended to apply only to "deposits" in the strict sense of the word. Otherwise,
there would have been no need to add the phrase "or invested."
Clearly, therefore, R.A. 1405 is broad enough to cover Trust Account No. 858.
The protection afforded by the law is, however, not absolute, there being recognized exceptions
thereto, as above-quoted Section 2 provides. In the present case, two exceptions apply, to wit:
(1) the examination of bank accounts is upon order of a competent court in cases of bribery or
dereliction of duty of public officials, and (2) the money deposited or invested is the subject
matter of the litigation.
Petitioner contends that since plunder is neither bribery nor dereliction of duty, his accounts
are not excepted from the protection of R.A. 1405. Philippine National Bank v. Gancayco7 holds
otherwise:
Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason
is seen why these two classes of cases cannot be excepted from the rule making bank deposits
97
confidential. The policy as to one cannot be different from the policy as to the other. This policy
expresses the notion that a public office is a public trust and any person who enters upon its
discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to
public scrutiny.
Undoubtedly, cases for plunder involve unexplained wealth. Section 2 of R.A. No. 7080 states
so.
SECTION 2. Definition of the Crime of Plunder; Penalties. Any public officer who, by himself
or in connivance with members of his family, relatives by affinity or consanguinity, business
associates, subordinates or other persons, amasses, accumulates or acquires ill-gotten wealth
through a combination or series of overt or criminal acts as described in Section 1(d) hereof, in
the aggregate amount or total value of at least Seventy-five million pesos (P75,000,000.00), shall
be guilty of the crime of plunder and shall be punished by life imprisonment with perpetual
absolute disqualification from holding any public office. Any person who participated with said
public officer in the commission of plunder shall likewise be punished. In the imposition of
penalties, the degree of participation and the attendance of mitigating and extenuating
circumstances shall be considered by the court. The court shall declare any and all ill-gotten
wealth and their interests and other incomes and assets including the properties and shares of
stock derived from the deposit or investment thereof forfeited in favor of the State. (Emphasis
and underscoring supplied)
An examination of the "overt or criminal acts as described in Section 1(d)" of R.A. No. 7080
would make the similarity between plunder and bribery even more pronounced since bribery is
essentially included among these criminal acts. Thus Section 1(d) states:
d) "Ill-gotten wealth" means any asset, property, business enterprise or material possession of
any person within the purview of Section Two (2) hereof, acquired by him directly or indirectly
through dummies, nominees, agents, subordinates and or business associates by any
combination or series of the following means or similar schemes.
1) Through misappropriation, conversion, misuse, or malversation of public funds or raids on
the public treasury;
2) By receiving, directly or indirectly, any commission, gift, share, percentage, kickbacks or any
other form of pecuniary benefit from any person and/or entity in connection with any
government contract or project or by reason of the office or position of the public officer
concerned;
3) By the illegal or fraudulent conveyance or disposition of assets belonging to the National
Government or any of its subdivisions, agencies or instrumentalities or government-owned or -
controlled corporations and their subsidiaries;
4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any
other form of interest or participation including promise of future employment in any business
enterprise or undertaking;
5) By establishing agricultural, industrial or commercial monopolies or other combinations
and/or implementation of decrees and orders intended to benefit particular persons or special
interests; or
6) By taking undue advantage of official position, authority, relationship, connection or influence
to unjustly enrich himself or themselves at the expense and to the damage and prejudice of the
Filipino people and the Republic of the Philippines. (Emphasis supplied)
Indeed, all the above-enumerated overt acts are similar to bribery such that, in each case, it may
be said that "no reason is seen why these two classes of cases cannot be excepted from the rule
making bank deposits confidential."8
The crime of bribery and the overt acts constitutive of plunder are crimes committed by public
officers, and in either case the noble idea that "a public office is a public trust and any person
who enters upon its discharge does so with the full knowledge that his life, so far as relevant to
his duty, is open to public scrutiny" applies with equal force.
Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of
bribery must also apply to cases of plunder.
Respecting petitioners claim that the money in his bank accounts is not the "subject matter of
the litigation," the meaning of the phrase "subject matter of the litigation" as used in R.A. 1405
is explained in Union Bank of the Philippines v. Court of Appeals,9 thus:
Petitioner contends that the Court of Appeals confuses the "cause of action" with the "subject
of the action". In Yusingco v. Ong Hing Lian, petitioner points out, this Court distinguished the
two concepts.
x x x "The cause of action is the legal wrong threatened or committed, while the object of the
action is to prevent or redress the wrong by obtaining some legal relief; but the subject of the
action is neither of these since it is not the wrong or the relief demanded, the subject of the
action is the matter or thing with respect to which the controversy has arisen, concerning which
98
the wrong has been done, and this ordinarily is the property or the contract and its subject
matter, or the thing in dispute."
The argument is well-taken. We note with approval the difference between the subject of the
action from the cause of action. We also find petitioners definition of the phrase subject
matter of the action is consistent with the term subject matter of the litigation, as the latter is
used in the Bank Deposits Secrecy Act.
In Mellon Bank, N.A. v. Magsino, where the petitioner bank inadvertently caused the transfer of
the amount of US$1,000,000.00 instead of only US$1,000.00, the Court sanctioned the
examination of the bank accounts where part of the money was subsequently caused to be
deposited:
x x x Section 2 of [Republic Act No. 1405] allows the disclosure of bank deposits in cases where
the money deposited is the subject matter of the litigation. Inasmuch as Civil Case No. 26899 is
aimed at recovering the amount converted by the Javiers for their own benefit, necessarily, an
inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed
by being held or recorded in the name of persons other than the one responsible for the illegal
acquisition."
Clearly, Mellon Bank involved a case where the money deposited was the subject matter of the
litigation since the money deposited was the very thing in dispute. x x x" (Emphasis and
underscoring supplied)
The plunder case now pending with the Sandiganbayan necessarily involves an inquiry into the
whereabouts of the amount purportedly acquired illegally by former President Joseph Estrada.
In light then of this Courts pronouncement in Union Bank, the subject matter of the litigation
cannot be limited to bank accounts under the name of President Estrada alone, but must include
those accounts to which the money purportedly acquired illegally or a portion thereof was
alleged to have been transferred. Trust Account No. 858 and Savings Account No. 0116-17345-
9 in the name of petitioner fall under this description and must thus be part of the subject matter
of the litigation.
In a further attempt to show that the subpoenas issued by the Sandiganbayan are invalid and
may not be enforced, petitioner contends, as earlier stated, that the information found therein,
given their "extremely detailed" character, could only have been obtained by the Special
Prosecution Panel through an illegal disclosure by the bank officials concerned. Petitioner thus
claims that, following the "fruit of the poisonous tree" doctrine, the subpoenas must be
quashed.
Petitioner further contends that even if, as claimed by respondent People, the "extremely-
detailed" information was obtained by the Ombudsman from the bank officials concerned
during a previous investigation of the charges against President Estrada, such inquiry into his
bank accounts would itself be illegal.
Petitioner relies on Marquez v. Desierto10 where the Court held:
We rule that before an in camera inspection may be allowed there must be a pending case
before a court of competent jurisdiction. Further, the account must be clearly identified, the
inspection limited to the subject matter of the pending case before the court of competent
jurisdiction. The bank personnel and the account holder must be notified to be present during
the inspection, and such inspection may cover only the account identified in the pending case.
(Underscoring supplied)
As no plunder case against then President Estrada had yet been filed before a court of
competent jurisdiction at the time the Ombudsman conducted an investigation, petitioner
concludes that the information about his bank accounts were acquired illegally, hence, it may
not be lawfully used to facilitate a subsequent inquiry into the same bank accounts.
Petitioners attempt to make the exclusionary rule applicable to the instant case fails. R.A. 1405,
it bears noting, nowhere provides that an unlawful examination of bank accounts shall render
the evidence obtained therefrom inadmissible in evidence. Section 5 of R.A. 1405 only states
that "[a]ny violation of this law will subject the offender upon conviction, to an imprisonment
of not more than five years or a fine of not more than twenty thousand pesos or both, in the
discretion of the court."
The case of U.S. v. Frazin,11 involving the Right to Financial Privacy Act of 1978 (RFPA) of the
United States, is instructive.
Because the statute, when properly construed, excludes a suppression remedy, it would not be
appropriate for us to provide one in the exercise of our supervisory powers over the
administration of justice. Where Congress has both established a right and provided exclusive
remedies for its violation, we would "encroach upon the prerogatives" of Congress were we to
authorize a remedy not provided for by statute. United States v. Chanen, 549 F.2d 1306, 1313
(9th Cir.), cert. denied, 434 U.S. 825, 98 S.Ct. 72, 54 L.Ed.2d 83 (1977).
The same principle was reiterated in U.S. v. Thompson:12
99
x x x When Congress specifically designates a remedy for one of its acts, courts generally
presume that it engaged in the necessary balancing of interests in determining what the
appropriate penalty should be. See Michaelian, 803 F.2d at 1049 (citing cases); Frazin, 780 F.2d
at 1466. Absent a specific reference to an exclusionary rule, it is not appropriate for the courts
to read such a provision into the act.
Even assuming arguendo, however, that the exclusionary rule applies in principle to cases
involving R.A. 1405, the Court finds no reason to apply the same in this particular case.
Clearly, the "fruit of the poisonous tree" doctrine13 presupposes a violation of law. If there was
no violation of R.A. 1405 in the instant case, then there would be no "poisonous tree" to begin
with, and, thus, no reason to apply the doctrine.
How the Ombudsman conducted his inquiry into the bank accounts of petitioner is recounted
by respondent People of the Philippines, viz:
x x x [A]s early as February 8, 2001, long before the issuance of the Marquez ruling, the Office
of the Ombudsman, acting under the powers granted to it by the Constitution and R.A. No. 6770,
and acting on information obtained from various sources, including impeachment (of then Pres.
Joseph Estrada) related reports, articles and investigative journals, issued a Subpoena Duces
Tecum addressed to Urban Bank. (Attachment "1-b") It should be noted that the description of
the documents sought to be produced at that time included that of numbered accounts 727,
737, 747, 757, 777 and 858 and included such names as Jose Velarde, Joseph E. Estrada, Laarni
Enriquez, Guia Gomez, Joy Melendrez, Peachy Osorio, Rowena Lopez, Kevin or Kelvin Garcia.
The subpoena did not single out account 858.
xxxx
Thus, on February 13, 2001, PDIC, as receiver of Urban Bank, issued a certification as to the
availability of bank documents relating to A/C 858 and T/A 858 and the non-availability of bank
records as to the other accounts named in the subpoena. (Attachments "2", "2-1" and "2-b)
Based on the certification issued by PDIC, the Office of the Ombudsman on February 16, 2001
again issued a Subpoena Duces Tecum directed to Ms. Corazon dela Paz, as Interim Receiver,
directing the production of documents pertinent to account A/C 858 and T/C 858. (Attachment
"3")
In compliance with the said subpoena dated February 16, 2001, Ms. Dela Paz, as interim
receiver, furnished the Office of the Ombudsman certified copies of documents under cover
latter dated February 21, 2001:
1. Transaction registers dated 7-02-99, 8-16-99, 9-17-99, 10-18-99, 11-22-99, 1-07-00, 04-03-00
and 04-24-00;
2. Report of Unregularized TAFs & TDs for UR COIN A & B Placements of Various Branches as of
February 29, 2000 and as of December 16, 1999; and
3. Trading Orders Nos. A No. 78102 and A No. 078125.
Trading Order A No. 07125 is filed in two copies a white copy which showed "set up"
information; and a yellow copy which showed "reversal" information. Both copies have been
reproduced and are enclosed with this letter.
We are continuing our search for other records and documents pertinent to your request and
we will forward to you on Friday, 23 February 2001, such additional records and documents as
we might find until then. (Attachment "4")
The Office of the Ombudsman then requested for the mangers checks, detailed in the Subpoena
Duces Tecum dated March 7, 2001. (Attachment "5")
PDIC again complied with the said Subpoena Duces Tecum dated March 7, 2001 and provided
copies of the managers checks thus requested under cover letter dated March 16, 2001.
(Attachment "6")14 (Emphasis in the original)
The Sandiganbayan credited the foregoing account of respondent People.15 The Court finds no
reason to disturb this finding of fact by the Sandiganbayan.
The Marquez ruling notwithstanding, the above-described examination by the Ombudsman of
petitioners bank accounts, conducted before a case was filed with a court of competent
jurisdiction, was lawful.
For the Ombudsman issued the subpoenas bearing on the bank accounts of petitioner about
four months before Marquez was promulgated on June 27, 2001.
While judicial interpretations of statutes, such as that made in Marquez with respect to R.A. No.
6770 or the Ombudsman Act of 1989, are deemed part of the statute as of the date it was
originally passed, the rule is not absolute.
Columbia Pictures, Inc. v. Court of Appeals16 teaches:
100
It is consequently clear that a judicial interpretation becomes a part of the law as of the date
that law was originally passed, subject only to the qualification that when a doctrine of this Court
is overruled and a different view is adopted, and more so when there is a reversal thereof, the
new doctrine should be applied prospectively and should not apply to parties who relied on the
old doctrine and acted in good faith. (Emphasis and underscoring supplied)
When this Court construed the Ombudsman Act of 1989, in light of the Secrecy of Bank Deposits
Law in Marquez, that "before an in camera inspection may be allowed there must be a pending
case before a court of competent jurisdiction", it was, in fact, reversing an earlier doctrine found
in Banco Filipino Savings and Mortgage Bank v. Purisima17.
Banco Filipino involved subpoenas duces tecum issued by the Office of the Ombudsman, then
known as the Tanodbayan,18 in the course of its preliminary investigation of a charge of
violation of the Anti-Graft and Corrupt Practices Act.
While the main issue in Banco Filipino was whether R.A. 1405 precluded the Tanodbayans
issuance of subpoena duces tecum of bank records in the name of persons other than the one
who was charged, this Court, citing P.D. 1630,19 Section 10, the relevant part of which states:
(d) He may issue a subpoena to compel any person to appear, give sworn testimony, or produce
documentary or other evidence the Tanodbayan deems relevant to a matter under his inquiry,
held that "The power of the Tanodbayan to issue subpoenae ad testificandum and subpoenae
duces tecum at the time in question is not disputed, and at any rate does not admit of doubt."20
As the subpoenas subject of Banco Filipino were issued during a preliminary investigation, in
effect this Court upheld the power of the Tandobayan under P.D. 1630 to issue subpoenas duces
tecum for bank documents prior to the filing of a case before a court of competent jurisdiction.
Marquez, on the other hand, practically reversed this ruling in Banco Filipino despite the fact
that the subpoena power of the Ombudsman under R.A. 6770 was essentially the same as that
under P.D. 1630. Thus Section 15 of R.A. 6770 empowers the Office of the Ombudsman to
(8) Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any
investigation or inquiry, including the power to examine and have access to bank accounts and
records;
A comparison of this provision with its counterpart in Sec. 10(d) of P.D. 1630 clearly shows that
it is only more explicit in stating that the power of the Ombudsman includes the power to
examine and have access to bank accounts and records which power was recognized with
respect to the Tanodbayan through Banco Filipino.
The Marquez ruling that there must be a pending case in order for the Ombudsman to validly
inspect bank records in camera thus reversed a prevailing doctrine.21 Hence, it may not be
retroactively applied.
The Ombudsmans inquiry into the subject bank accounts prior to the filing of any case before a
court of competent jurisdiction was therefore valid at the time it was conducted.
Likewise, the Marquez ruling that "the account holder must be notified to be present during the
inspection" may not be applied retroactively to the inquiry of the Ombudsman subject of this
case. This ruling is not a judicial interpretation either of R.A. 6770 or R.A. 1405, but a "judge-
made" law which, as People v. Luvendino22 instructs, can only be given prospective application:
x x x The doctrine that an uncounselled waiver of the right to counsel is not to be given legal
effect was initially a judge-made one and was first announced on 26 April 1983 in Morales v.
Enrile and reiterated on 20 March 1985 in People v. Galit. x x x
While the Morales-Galit doctrine eventually became part of Section 12(1) of the 1987
Constitution, that doctrine affords no comfort to appellant Luvendino for the requirements and
restrictions outlined in Morales and Galit have no retroactive effect and do not reach waivers
made prior to 26 April 1983 the date of promulgation of Morales. (Emphasis supplied)
In fine, the subpoenas issued by the Ombudsman in this case were legal, hence, invocation of
the "fruit of the poisonous tree" doctrine is misplaced.
At all events, even if the challenged subpoenas are quashed, the Ombudsman is not barred from
requiring the production of the same documents based solely on information obtained by it
from sources independent of its previous inquiry.
In particular, the Ombudsman, even before its inquiry, had already possessed information giving
him grounds to believe that (1) there are bank accounts bearing the number "858," (2) that such
accounts are in the custody of Urban Bank, and (3) that the same are linked with the bank
accounts of former President Joseph Estrada who was then under investigation for plunder.
Only with such prior independent information could it have been possible for the Ombudsman
to issue the February 8, 2001 subpoena duces tecum addressed to the President and/or Chief
Executive Officer of Urban Bank, which described the documents subject thereof as follows:
101
(a) bank records and all documents relative thereto pertaining to all bank accounts (Savings,
Current, Time Deposit, Trust, Foreign Currency Deposits, etc) under the account names of Jose
Velarde, Joseph E. Estrada, Laarni Enriquez, Guia Gomez, Joy Melendrez, Peach Osorio, Rowena
Lopez, Kevin or Kelvin Garcia, 727, 737, 747, 757, 777 and 858. (Emphasis and underscoring
supplied)
The information on the existence of Bank Accounts bearing number "858" was, according to
respondent People of the Philippines, obtained from various sources including the proceedings
during the impeachment of President Estrada, related reports, articles and investigative
journals.23 In the absence of proof to the contrary, this explanation proffered by respondent
must be upheld. To presume that the information was obtained in violation of R.A. 1405 would
infringe the presumption of regularity in the performance of official functions.
Thus, with the filing of the plunder case against former President Estrada before the
Sandiganbayan, the Ombudsman, using the above independent information, may now proceed
to conduct the same investigation it earlier conducted, through which it can eventually obtain
the same information previously disclosed to it by the PDIC, for it is an inescapable fact that the
bank records of petitioner are no longer protected by R.A. 1405 for the reasons already
explained above.1wphi1
or dereliction of duty, while exception (2) applies because the money deposited in petitioners
bank accounts is said to form part of the subject matter of the same plunder case.
2. The "fruit of the poisonous tree" principle, which states that once the primary source (the
"tree") is shown to have been unlawfully obtained, any secondary or derivative evidence (the
"fruit") derived from it is also inadmissible, does not apply in this case. In the first place, R.A.
1405 does not provide for the application of this rule. Moreover, there is no basis for applying
the same in this case since the primary source for the detailed information regarding petitioners
bank accounts the investigation previously conducted by the Ombudsman was lawful.
3. At all events, even if the subpoenas issued by the Sandiganbayan were quashed, the
Ombudsman may conduct on its own the same inquiry into the subject bank accounts that it
earlier conducted last February-March 2001, there being a plunder case already pending against
former President Estrada. To quash the challenged subpoenas would, therefore, be pointless
since the Ombudsman may obtain the same documents by another route. Upholding the
subpoenas avoids an unnecessary delay in the administration of justice.
WHEREFORE, the petition is DISMISSED. The Sandiganbayan Resolutions dated February 7 and
12, 2003 and March 11, 2003 are upheld.

Since conducting such an inquiry would, however, only result in the disclosure of the same The Sandiganbayan is hereby directed, consistent with this Courts ruling in Marquez v. Desierto,
documents to the Ombudsman, this Court, in avoidance of what would be a time-wasteful and to notify petitioner as to the date the subject bank documents shall be presented in court by the
circuitous way of administering justice,24 upholds the challenged subpoenas. persons subpoenaed.

Respecting petitioners claim that the Sandiganbayan violated his right to due process as he was SO ORDERED.
neither notified of the requests for the issuance of the subpoenas nor of the grant thereof,
suffice it to state that the defects were cured when petitioner ventilated his arguments against
the issuance thereof through his earlier quoted letter addressed to the Sandiganbayan and
when he filed his motions to quash before the Sandiganbayan.

IN SUM, the Court finds that the Sandiganbayan did not commit grave abuse of discretion in
issuing the challenged subpoenas for documents pertaining to petitioners Trust Account No.
858 and Savings Account No. 0116-17345-9 for the following reasons:

1. These accounts are no longer protected by the Secrecy of Bank Deposits Law, there being two
exceptions to the said law applicable in this case, namely: (1) the examination of bank accounts
is upon order of a competent court in cases of bribery or dereliction of duty of public officials,
and (2) the money deposited or invested is the subject matter of the litigation. Exception (1)
applies since the plunder case pending against former President Estrada is analogous to bribery

102

G.R. No. 135882 June 27, 2001
LOURDES T. MARQUEZ, in her capacity as Branch Manager, UNION BANK OF THE
PHILIPPINES, petitioner,
vs.
HONORABLE ANIANO A. DESIERTO, in his capacity as OMBUDSMAN, ANGEL C. MAYOR-
ALGO, JR., MARY ANN CORPUZ-MANALAC AND JOSE T. DE JESUS, JR., in their capacity as
Chairman and Members of the Panel, respectively, respondents.
PARDO, J.:
In the petition at bar, petitioner seeks to --
a. Annul and set aside, for having been issued without or in excess of jurisdiction or with grave
abuse of discretion amounting to lack of jurisdiction, respondents' order dated September 7,
1998 in OMB-0-97-0411, In Re: Motion to Cite Lourdes T. Marquez for indirect contempt,
received by counsel of September 9,1998, and their order dated October 14,1998, denying
Marquez's motion for reconsideration dated September 10, 1998, received by counsel on
October 20, 1998.
b. Prohibit respondents from implementing their order dated October 14, 1998, in proceeding
with the hearing of the motion to cite Marquez for indirect contempt, through the issuance by
this Court of a temporary restraining order and/or preliminary injunction.1
The antecedent facts are as follows:
Sometime in May 1998, petitioner Marquez received an Order from the Ombudsman Aniano A.
Desierto dated April 29, 1998, to produce several bank documents for purposes of inspection in
camera relative to various accounts maintained at Union Bank of the Philippines, Julia Vargas
Branch, where petitioner is the branch manager. The accounts to be inspected are Account Nos.
011-37270, 240-020718, 245-30317-3 and 245-30318-1, involved in a case pending with the
Ombudsman entitled, Fact-Finding and Intelligence Bureau (FFIB) v. Amado Lagdameo, et al. The
order further states:
"It is worth mentioning that the power of the Ombudsman to investigate and to require the
production and inspection of records and documents is sanctioned by the 1987 Philippine
Constitution, Republic Act No. 6770, otherwise known as Ombudsman Act of 1989 and under
existing jurisprudence on the matter. It must be noted that R.A. 6770 especially Section 15
thereof provides, among others, the following powers, functions and duties of the Ombudsman,
to wit:
xxx
(8) Administer oaths, issue subpoena duces tecum and take testimony in any investigation or
inquiry, including the power to examine and have access to banks accounts and records;
(9) Punish for contempt in accordance with the Rules of Court and under the same procedure
and with the same penalties provided therein.
Clearly, the specific provision of R.A. 6770, a later legislation, modifies the law on the Secrecy of
Bank Deposits (R.A.1405) and places the office of the Ombudsman in the same footing as the
courts of law in this regard."2
The basis of the Ombudsman in ordering an in camera inspection of the accounts is a trail
managers checks purchased by one George Trivinio, a respondent in OMB-097-0411, pending
with the office of the Ombudsman.
It would appear that Mr. George Trivinio, purchased fifty one (51) Managers Checks (MCs) for a
total amount of P272.1 Million at Traders Royal Bank, United Nations Avenue branch, on May 2
and 3, 1995. Out of the 51 MCs, eleven (11) MCs in the amount of P70.6 million, were deposited
and credited to an account maintained at the Union Bank, Julia Vargas Branch.3
On May 26, 1998, the FFIB panel met in conference with petitioner Lourdes T. Marquez and Atty.
Fe B. Macalino at the bank's main office, Ayala Avenue, Makati City. The meeting was for the
purpose of allowing petitioner and Atty. Macalino to view the checks furnished by Traders Royal
Bank. After convincing themselves of the veracity of the checks, Atty. Macalino advised Ms.
Marquez to comply with the order of the Ombudsman. Petitioner agreed to an in camera
inspection set on June 3, 1998.4
However, on June 4,1998, petitioner wrote the Ombudsman explaining to him that the accounts
in question cannot readily be identified and asked for time to respond to the order. The reason
forwarded by the petitioner was that "despite diligent efforts and from the accounts numbers
presented, we can not identify these accounts since the checks are issued in cash or bearer. We
surmised that these accounts have long been dormant, hence are not covered by the new
account number generated by the Union Bank system. We therefore have to verify from the
Interbank records archives for the whereabouts of these accounts.5
103
The Ombudsman, responding to the request of the petitioner for time to comply with the order,
stated: "firstly, it must be emphasized that Union Bank, Julia Vargas Branch was depositary bank
of the subject Traders Royal Bank Manager's Check (MCs), as shown at its dorsal portion and as
cleared by the Philippines Clearing House, not the International Corporate Bank.
Notwithstanding the facts that the checks were payable to cash or bearer, nonetheless, the
name of the depositor(s) could easily be identified since the account numbers x x x where said
checks were deposited are identified in the order.
Even assuming that the accounts xxx were already classified as "dormant accounts," the bank is
still required to preserve the records pertaining to the accounts within a certain period of time
as required by existing banking rules and regulations.
And finally, the in camera inspection was already extended twice from May 13, 1998 to June
3,1998 thereby giving the bank enough time within which to sufficiently comply with the
order."6
Thus, on June 16, 1998, the Ombudsman issued an order directing petitioner to produce the
bank documents relative to accounts in issue. The order states:
Viewed from the foregoing, your persistent refusal to comply with Ombudsman's order in
unjustified, and is merely intended to delay the investigation of the case. Your act constitutes
disobedience of or resistance to a lawful order issued by this office and is punishable as Indirect
Contempt under Section 3(b) of R.A. 6770. The same may also constitute obstruction in the
lawful exercise of the functions of the Ombudsman which is punishable under Section 36 of R.A.
6770.7
On July 10,1998, petitioner together with Union Bank of the Philippines, filed a petition for
declaratory relief, prohibition and injunctions8 with the Regional Trial Court, Makati City, against
the Ombudsman.
The petition was intended to clear the rights and duties of petitioner. Thus, petitioner sought a
declaration of her rights from the court due to the clear conflict between RA No.6770, Section
15 and R.A. No. 1405, Sections 2 and 3.
Petitioner prayed for a temporary restraining order (TRO) because the Ombudsman and the
other persons acting under his authority were continuously harassing her to produce the bank
documents relatives to the accounts in question. Moreover, on June 16, 1998, the Ombudsman
issued another order stating that unless petitioner appeared before the FFIB with the
documents requested, petitioner manager would be charged with indirect contempt and
obstruction of justice.
In the meantime,9 on July 14, 1998, the lower court denied petitioner's prayer for a temporary
restraining order and stated us:
"After hearing the arguments of the parties, the court finds the application for a Temporary
Restraining Order to be without merit.
"Since the application prays for restraint of the respondent, in the exercise of his contempt
powers under Section 15(9) in relation to paragraph (8) of RA. 6770, known as " The Ombudsman
Act of 1989", there is no great or irreparable injury from which petitioners may suffer, if
respondent is not so restrained. Respondent should he decide to exercise his contempt powers
would still have to apply with the court. x x x Anyone who, without lawful excuse x x x refuses
to produce documents for inspection, when thereunto lawfully required shall be subject to
discipline as in case of contempt of Court and upon application of the individual or body
exercising the power in question shall be dealt with by the Judge of the First Instance (now RTC)
having jurisdiction of the case in a manner provided by the law (section 580 of the Revised
Administrative Code). Under the present Constitution only judges may issue warrants, hence,
respondent should apply with the Court for the issuance of the warrant needed for the
enforcement of his contempt orders. It is in these proceedings where petitioner may question
the propriety of respondent's exercise of his contempt powers. Petitioners are not therefore left
without any adequate remedy.
"The questioned orders were issued with the investigation of the case of Fact-Finding and
Intelligence Bureau vs. Amado Lagdameo, et. al., OMB-0-97-0411, for violation of RA. 3019.
Since petitioner failed to show prima facie evidence that the subject matter of the investigation
is outside the jurisdiction of the Office of the Ombudsman, no writ of injunction may be issued
by this Court to delay this investigation pursuant to section 14 of Ombudsman Act of 1989."10
On July 20,1998, petitioner filed a motion for reconsideration based on the following grounds:
a. Petitioners' application for filed Temporary Restraining Order is not only to restrain the
Ombudsman from exercising his contempt powers, but to stop him from implementing his
Orders dated April 29, 1998 and June 16, 1998: and
b. The subject matter of the investigation being conducted by the Ombudsman at petitioners'
premises is outside his jurisdiction.11
104
On July 23, 1998, the Ombudsman filed a motion to dismiss the petition for declaratory relief12
on the ground that the Regional Trial Court has no jurisdiction to hear a petition for relief from
the findings and orders of the Ombudsman, citing R.A. No. 6770, Sections 14 and 27. On August
7, 1998, the Ombudsman filed an opposition to petitioner's motion for reconsideration dated
July 20, 1998.13
On August 19,1998, the lower court denied petitioner's motion for reconsideration,14 and also
the Ombudsman's motion to dismiss. 15
On August 21, 1998, petitioner received a copy of the motion to cite her for contempt, filed with
the Office of the Ombudsman by Agapito B. Rosales, Director, Fact Finding and Intelligence
Bureau (FFIB).16
On August 31, 1998, petitioner filed with the Ombudsman an opposition to the motion to cite
her in contempt on the ground that the filing thereof was premature due to the petition pending
in the lower court.17 Petitioner likewise reiterated that she had no intention to disobey the
orders of the Ombudsman. However, she wanted to be clarified as to how she would comply
with the orders without her breaking any law, particularly RA. No. 1405.18
Respondent Ombudsman panel set the incident for hearing on September 7, 1998.19 After
hearing, the panel issued an order dated September 7, 1998, ordering petitioner and counsel to
appear for a continuation of the hearing of the contempt charges against her.20
On September 10, 1998, petitioner filed with the Ombudsman a motion for reconsideration of
the above order.21 Her motion was premised on the fact that there was a pending case with the
Regional Trial Court, Makati City,22 which would determine whether obeying the orders of the
Ombudsman to produce bank documents would not violate any law.
The FFIB opposed the motion,23 and on October 14, 1998, the Ombudsman denied the motion
by order the dispositive portion of which reads:
"Wherefore, respondent Lourdes T. Marquez's motion for reconsideration is hereby DENIED, for
lack of merit. Let the hearing of the motion of the Fact Finding Intelligence Bureau (FFIB) to cite
her for indirect contempt to be intransferrably set to 29 October 1998 at 2:00 o'clock p.m. at
which date and time she should appear personally to submit her additional evidence. Failure to
do so shall be deemed a waiver thereof."24
Hence, the present petition.25
The issue is whether petitioner may be cited for indirect contempt for her failure to produce the
documents requested by the Ombudsman. And whether the order of the Ombudsman to have
an in camera inspection of the questioned account is allowed as an exception to the law on
secrecy of bank deposits (R.A. No.1405).
An examination of the secrecy of bank deposits law (R.A. No.1405) would reveal the following
exceptions:
1. Where the depositor consents in writing;
2. Impeachment case;
3. By court order in bribery or dereliction of duty cases against public officials;
4. Deposit is subject of litigation;
5. Sec. 8, R.A. No.3019, in cases of unexplained wealth as held in the case of PNB vs. Gancayco.26
The order of the Ombudsman to produce for in camera inspection the subject accounts with the
Union Bank of the Philippines, Julia Vargas Branch, is based on a pending investigation at the
Office of the Ombudsman against Amado Lagdameo, et. al. for violation of R.A. No. 3019, Sec. 3
(e) and (g) relative to the Joint Venture Agreement between the Public Estates Authority and
AMARI.
We rule that before an in camera inspection may be allowed, there must be a pending case
before a court of competent jurisdiction. Further, the account must be clearly identified, the
inspection limited to the subject matter of the pending case before the court of competent
jurisdiction. The bank personnel and the account holder must be notified to be present during
the inspection, and such inspection may cover only the account identified in the pending case.
In Union Bank of the Philippines v. Court of Appeals, we held that "Section 2 of the Law on
Secrecy of Bank Deposits, as amended, declares bank deposits to be "absolutely confidential"
except:
(1) In an examination made in the course of a special or general examination of a bank that is
specifically authorized by the Monetary Board after being satisfied that there is reasonable
ground to believe that a bank fraud or serious irregularity has been or is being committed and
that it is necessary to look into the deposit to establish such fraud or irregularity,
105
(2) In an examination made by an independent auditor hired by the bank to conduct its regular
audit provided that the examination is for audit purposes only and the results thereof shall be
for the exclusive use of the bank,
(3) Upon written permission of the depositor,
(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or
(6) In cases where the money deposited or invested is the subject matter of the litigation".27
In the case at bar, there is yet no pending litigation before any court of competent authority.
What is existing is an investigation by the Office of the Ombudsman. In short, what the office of
the ombudsman would wish to do is to fish for additional evidence to formally charge Amado
Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court which
would warrant the opening of the bank account for inspection.
Zone of privacy are recognized and protected in our laws. The Civil Code provides that" [e]very
person shall respect the dignity, personality, privacy and peace of mind of his neighbors and
other persons" and punishes as actionable torts several acts for meddling and prying into the
privacy of another. It also holds public officer or employee or any private individual liable for
damages for any violation of the rights and liberties of another person, and recognizes the
privacy of letters and other private communications. The Revised Penal Code makes a crime of
the violation of secrets by an officer, revelation of trade and industrial secrets, and trespass to
dwelling. Invasion of privacy is an offense in special laws like the Anti-Wiretapping Law, the
Secrecy of Bank Deposits Act, and the Intellectual Property Code.28
IN VIEW WHEREOF, we GRANT the petition. We order the Ombudsman to cease and desist from
requiring Union Bank Manager Lourdes T. Marquez, or anyone in her place to comply with the
order dated October 14,1998, and similar orders. No costs.
SO ORDERED .
G.R. No. 140687 December 18, 2006
CHINA BANKING CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and JOSE "JOSEPH" GOTIANUY as substituted by
ELIZABETH GOTIANUY LO, respondents.
DECISION
CHICO-NAZARIO, J.:
A Complaint for recovery of sums of money and annulment of sales of real properties and shares
of stock docketed as CEB-21445 was filed by Jose "Joseph" Gotianuy against his son-in-law,
George Dee, and his daughter, Mary Margaret Dee, before the Regional Trial Court (RTC) of Cebu
City, Branch 58.
Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, among his other properties,
US dollar deposits with Citibank N.A. amounting to not less than P35,000,000.00 and
US$864,000.00. Mary Margaret Dee received these amounts from Citibank N.A. through checks
which she allegedly deposited at China Banking Corporation (China Bank). He likewise accused
his son-in-law, George Dee, husband of his daughter, Mary Margaret, of transferring his real
properties and shares of stock in George Dee's name without any consideration. Jose Gotianuy,
died during the pendency of the case before the trial court.1 He was substituted by his daughter,
Elizabeth Gotianuy Lo. The latter presented the US Dollar checks withdrawn by Mary Margaret
Dee from his US dollar placement with Citibank. The details of the said checks are:
1) CITIBANK CHECK NO. 69003194405412 dated September 29 1997 in the amount of
US$5,937.52 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
2) CITIBANK CHECK NO. 69003194405296 dated September 29 1997 in the amount of
US$7,197.59 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
106
3) CITIBANK CHECK NO. 69003194405414 dated September 29 1997 in the amount of
US$1,198.94 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
4) CITIBANK CHECK NO. 69003194405413 dated September 29 1997 in the amount of US$989.04
payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
5) CITIBANK CHECK NO. 69003194405297 dated October 01 1997 in the amount of
US$766,011.97 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET; and
6) CITIBANK CHECK NO. 69003194405339 dated October 09 1997 in the amount of
US$83,053.10 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET.2
Upon motion of Elizabeth Gotianuy Lo, the trial court3 issued a subpoena to Cristota Labios and
Isabel Yap, employees of China Bank, to testify on the case. The Order of the trial court dated
23 February 1999, states:
Issue a subpoena ad testificandum requiring MS. ISABEL YAP and CRISTOTA LABIOS of China
Banking Corporation, Cebu Main Branch, corner Magallanes and D. Jakosalem Sts., Cebu City, to
appear in person and to testify in the hearing of the above entitled case on March 1, 1999 at
8:30 in the morning, with regards to Citibank Checks (Exhs. "AAA" to "AAA-5") and other matters
material and relevant to the issues of this case.4
China Bank moved for a reconsideration. Resolving the motion, the trial court issued an Order
dated 16 April 1999 and held:
The Court is of the view that as the foreign currency fund (Exhs. "AAA" to "AAA-5") is deposited
with the movant China Banking Corporation, Cebu Main Branch, Cebu City, the disclosure only
as to the name or in whose name the said fund is deposited is not violative of the law. Justice
will be better served if the name or names of the depositor of said fund shall be disclosed
because such a disclosure is material and important to the issues between the parties in the
case at bar.
Premises considered, the motion for reconsideration is denied partly and granted partly, in the
sense that Isabel Yap and/or Cristuta Labios are directed to appear before this Court and to
testify at the trial of this case on April 20, 1999, May 6 & 7, 1999 at 10:00 o'clock in the morning
and only for the purpose of disclosing in whose name or names is the foreign currency fund
(Exhs. "AAA" to "AAA-5") deposited with the movant Bank and not to other matters material
and relevant to the issues in the case at bar.5
From this Order, China Bank filed a Petition for Certiorari6 with the Court of Appeals. In a
Decision7 dated 29 October 1999, the Court of Appeals denied the petition of China Bank and
affirmed the Order of the RTC.
In justifying its conclusion, the Court of Appeals ratiocinated:
From the foregoing, it is pristinely clear the law specifically encompasses only the money or
funds in foreign currency deposited in a bank. Thus, the coverage of the law extends only to the
foreign currency deposit in the CBC account where Mary Margaret Dee deposited the Citibank
checks in question and nothing more.
It has to be pointed out that the April 16, 1999 Order of the court of origin modified its previous
February 23, 1999 Order such that the CBC representatives are directed solely to divulge "in
whose name or names is the foreign currency fund (Exhs. "AAA" to "AAA-5") deposited with the
movant bank." It precluded inquiry on "other materials and relevant to the issues in the case at
bar." We find that the directive of the court below does not contravene the plain language of
RA 6426 as amended by P.D. No. 1246.
The contention of petitioner that the [prescription] on absolute confidentiality under the law in
question covers even the name of the depositor and is beyond the compulsive process of the
courts is palpably untenable as the law protects only the deposits itself but not the name of the
depositor. To uphold the theory of petitioner CBC is reading into the statute "something that is
not within the manifest intention of the legislature as gathered from the statute itself, for to
depart from the meaning expressed by the words, is to alter the statute, to legislate and not to
interpret, and judicial legislation should be avoided. Maledicta expositio quae corrumpit textum
It is a dangerous construction which is against the words. Expressing the same principle is the
maxim: Ubi lex non distinguit nec nos distinguere debemos, which simply means that where the
law does not distinguish, we should not make any distinction." (Gonzaga, Statutes and their
Construction, p. 75.)8
From the Decision of the Court of Appeals, China Bank elevated the case to this Court based on
the following issues:
I
THE HONORABLE COURT OF APPEALS HAS INTERPRETED THE PROVISION OF SECTION 8 OF R.A.
6426, AS AMENDED, OTHERWISE KNOWN AS THE FOREIGN CURRENCY DEPOSIT ACT, IN A
MANNER CONTRARY TO THE LEGISLATIVE PURPOSE, THAT IS, TO PROVIDE ABSOLUTE
CONFIDENTIALITY OF WHATEVER INFORMATION RELATIVE TO THE FOREIGN CURRENCY
DEPOSIT.
107

II
PRIVATE RESPONDENT IS NOT THE OWNER OF THE QUESTIONED FOREIGN CURRENCY DEPOSIT.
THUS, HE CANNOT INVOKE THE AID OF THE COURT IN COMPELLING THE DISCLOSURE OF
SOMEONE ELSE'S FOREIGN CURRENCY DEPOSIT ON THE FLIMSY PRETEXT THAT THE CHECKS (IN
FOREIGN CURRENCY) HE HAD ISSUED MAY HAVE ENDED UP THEREIN.
III
PETITIONER CAN RIGHTLY INVOKE THE PROVISION OF SEC. 8, R.A. 6426, IN BEHALF OF THE
FOREIGN CURRENCY DEPOSITOR, OWING TO ITS SOLEMN OBLIGATION TO ITS CLIENT TO
EXERCISE EXTRAORDINARY DILIGENCE IN THE HANDLING OF THE ACCOUNT.9
As amended by Presidential Decree No. 1246, the law reads:
SEC. 8. Secrecy of Foreign Currency Deposits. All foreign currency deposits authorized under
this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written permission of the depositor, in no
instance shall such foreign currency deposits be examined, inquired or looked into by any
person, government official, bureau or office whether judicial or administrative or legislative or
any other entity whether public or private: Provided, however, that said foreign currency
deposits shall be exempt from attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative body whatsoever. (As
amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977) (Emphasis
supplied.)
Under the above provision, the law provides that all foreign currency deposits authorized under
Republic Act No. 6426, as amended by Sec. 8, Presidential Decree No. 1246, Presidential Decree
No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034
are considered absolutely confidential in nature and may not be inquired into. There is only one
exception to the secrecy of foreign currency deposits, that is, disclosure is allowed upon the
written permission of the depositor.
This much was pronounced in the case of Intengan v. Court of Appeals,10 where it was held that
the only exception to the secrecy of foreign currency deposits is in the case of a written
permission of the depositor.
It must be remembered that under the whereas clause of Presidential Decree No. 1246 which
amended Sec. 8 of Republic Act No. 6426, the Foreign Currency Deposit System including the
Offshore Banking System under Presidential Decree 1034 were intended to draw deposits from
foreign lenders and investors, and we quote:
Whereas, in order to assure the development and speedy growth of the Foreign Currency
Deposit System and the Offshore Banking System in the Philippines, certain incentives were
provided for under the two Systems such as confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest income of depositors who are nonresidents and
are not engaged in trade or business in the Philippines;
Whereas, making absolute the protective cloak of confidentiality over such foreign currency
deposits, exempting such deposits from tax, and guaranteeing the vested rights of depositors
would better encourage the inflow of foreign currency deposits into the banking institutions
authorized to accept such deposits in the Philippines thereby placing such institutions more in a
position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country.
As to the deposit in foreign currencies entitled to be protected under the confidentiality rule,
Presidential Decree No. 1034,11 defines deposits to mean funds in foreign currencies which are
accepted and held by an offshore banking unit in the regular course of business, with the
obligation to return an equivalent amount to the owner thereof, with or without interest.12
It is in this light that the court in the case of Salvacion v. Central Bank of the Philippines,13
allowed the inquiry of the foreign currency deposit in question mainly due to the peculiar
circumstances of the case such that a strict interpretation of the letter of the law would result
to rank injustice. Therein, Greg Bartelli y Northcott, an American tourist, was charged with
criminal cases for serious illegal detention and rape committed against then 12 year-old Karen
Salvacion. A separate civil case for damages with preliminary attachment was filed against Greg
Bartelli. The trial court issued an Order granting the Salvacions' application for the issuance of a
writ of preliminary attachment. A notice of garnishment was then served on China Bank where
Bartelli held a dollar account. China Bank refused, invoking the secrecy of bank deposits. The
Supreme Court ruled: "In fine, the application of the law depends on the extent of its justice x x
x It would be unthinkable, that the questioned law exempting foreign currency deposits from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever would be used as a device by an
accused x x x for wrongdoing, and in so doing, acquitting the guilty at the expense of the
innocent.14
108
With the foregoing, we are now tasked to determine the single material issue of whether or not
petitioner China Bank is correct in its submission that the Citibank dollar checks with both Jose
Gotianuy and/or Mary Margaret Dee as payees, deposited with China Bank, may not be looked
into under the law on secrecy of foreign currency deposits. As a corollary issue, sought to be
resolved is whether Jose Gotianuy may be considered a depositor who is entitled to seek an
inquiry over the said deposits.
The Court of Appeals, in allowing the inquiry, considered Jose Gotianuy, a co-depositor of Mary
Margaret Dee. It reasoned that since Jose Gotianuy is the named co-payee of the latter in the
subject checks, which checks were deposited in China Bank, then, Jose Gotianuy is likewise a
depositor thereof. On that basis, no written consent from Mary Margaret Dee is necessitated.
We agree in the conclusion arrived at by the Court of Appeals.
The following facts are established: (1) Jose Gotianuy and Mary Margaret Dee are co-payees of
various Citibank checks;15 (2) Mary Margaret Dee withdrew these checks from Citibank;16 (3)
Mary Margaret Dee admitted in her Answer to the Request for Admissions by the Adverse Party
sent to her by Jose Gotianuy17 that she withdrew the funds from Citibank upon the instruction
of her father Jose Gotianuy and that the funds belonged exclusively to the latter; (4) these
checks were endorsed by Mary Margaret Dee at the dorsal portion; and (5) Jose Gotianuy
discovered that these checks were deposited with China Bank as shown by the stamp of China
Bank at the dorsal side of the checks.
Thus, with this, there is no issue as to the source of the funds. Mary Margaret Dee declared the
source to be Jose Gotianuy. There is likewise no dispute that these funds in the form of Citibank
US dollar Checks are now deposited with China Bank.
As the owner of the funds unlawfully taken and which are undisputably now deposited with
China Bank, Jose Gotianuy has the right to inquire into the said deposits.
A depositor, in cases of bank deposits, is one who pays money into the bank in the usual course
of business, to be placed to his credit and subject to his check or the beneficiary of the funds
held by the bank as trustee.18
On this score, the observations of the Court of Appeals are worth reiterating:
Furthermore, it is indubitable that the Citibank checks were drawn against the foreign currency
account with Citibank, NA. The monies subject of said checks originally came from the late Jose
Gotianuy, the owner of the account. Thus, he also has legal rights and interests in the CBC
account where said monies were deposited. More importantly, the Citibank checks (Exhibits
"AAA" to "AAA-5") readily demonstrate (sic) that the late Jose Gotianuy is one of the payees of
said checks. Being a co-payee thereof, then he or his estate can be considered as a co-depositor
of said checks. Ergo, since the late Jose Gotianuy is a co-depositor of the CBC account, then his
request for the assailed subpoena is tantamount to an express permission of a depositor for the
disclosure of the name of the account holder. The April 16, 1999 Order perforce must be
sustained.19 (Emphasis supplied.)
One more point. It must be remembered that in the complaint of Jose Gotianuy, he alleged that
his US dollar deposits with Citibank were illegally taken from him. On the other hand, China Bank
employee Cristuta Labios testified that Mary Margaret Dee came to China Bank and deposited
the money of Jose Gotianuy in Citibank US dollar checks to the dollar account of her sister
Adrienne Chu.20 This fortifies our conclusion that an inquiry into the said deposit at China Bank
is justified. At the very least, Jose Gotianuy as the owner of these funds is entitled to a hearing
on the whereabouts of these funds.
All things considered and in view of the distinctive circumstances attendant to the present case,
we are constrained to render a limited pro hac vice ruling.21 Clearly it was not the intent of the
legislature when it enacted the law on secrecy on foreign currency deposits to perpetuate
injustice. This Court is of the view that the allowance of the inquiry would be in accord with the
rudiments of fair play,22 the upholding of fairness in our judicial system and would be an
avoidance of delay and time-wasteful and circuitous way of administering justice.23
WHEREFORE, premises considered, the Petition is DENIED. The Decision of the Court of Appeals
dated 29 October 1999 affirming the Order of the RTC, Branch 58, Cebu City dated 16 April 1999
is AFFIRMED and this case is ordered REMANDED to the trial court for continuation of hearing
with utmost dispatch consistent with the above disquisition. No costs.
SO ORDERED.
109

G.R. No. L-34964 January 31, 1973
CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants,
vs.
HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila,
Branch VIII, and VICENTE G. ACABAN, respondents-appellees.
Sy Santos, Del Rosario and Associates for petitioners-appellants.
Tagalo, Gozar and Associates for respondents-appellees.
MAKALINTAL, J.:
The only issue in this petition for certiorari to review the orders dated March 4, 1972 and March
27, 1972, respectively, of the Court of First Instance of Manila in its Civil Case No. 75138, is
whether or not a banking institution may validly refuse to comply with a court process garnishing
the bank deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405. *
On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista
Logging Co., Inc., B & B Forest Development Corporation and Marino Bautista for the collection
of a sum of money. Upon motion of the plaintiff the trial court declared the defendants in default
for failure to answer within the reglementary period, and authorized the Branch Clerk of Court
and/or Deputy Clerk to receive the plaintiff's evidence. On January 20, 1970 judgment by default
was rendered against the defendants.
To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the
defendant B & B Forest Development Corporation with the China Banking Corporation.
Accordingly, a notice of garnishment was issued by the Deputy Sheriff of the trial court and
served on said bank through its cashier, Tan Kim Liong. In reply, the bank' cashier invited the
attention of the Deputy Sheriff to the provisions of Republic Act No. 1405 which, it was alleged,
prohibit the disclosure of any information relative to bank deposits. Thereupon the plaintiff filed
a motion to cite Tan Kim Liong for contempt of court.
In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim
Liong was ordered "to inform the Court within five days from receipt of this order whether or
not there is a deposit in the China Banking Corporation of defendant B & B Forest Development
Corporation, and if there is any deposit, to hold the same intact and not allow any withdrawal
until further order from this Court." Tan Kim Liong moved to reconsider but was turned down
by order of March 27, 1972. In the same order he was directed "to comply with the order of this
Court dated March 4, 1972 within ten (10) days from the receipt of copy of this order, otherwise
his arrest and confinement will be ordered by the Court." Resisting the two orders, the China
Banking Corporation and Tan Kim Liong instituted the instant petition.
The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads:
Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of absolutely confidential nature
and may not be examined, inquired or looked into by any person, government official, bureau
or office, except upon written permission of the depositor, or in cases of impeachment, or upon
order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases
where the money deposited or invested is the subject matter of the litigation.
Sec 3. It shall be unlawful for any official or employee of a banking institution to disclose to
any person other than those mentioned in Section two hereof any information concerning said
deposits.
Sec. 5. Any violation of this law will subject offender upon conviction, to an imprisonment of
not more than five years or a fine of not more than twenty thousand pesos or both, in the
discretion of the court.
The petitioners argue that the disclosure of the information required by the court does not fall
within any of the four (4) exceptions enumerated in Section 2, and that if the questioned orders
are complied with Tan Kim Liong may be criminally liable under Section 5 and the bank exposed
to a possible damage suit by B & B Forest Development Corporation. Specifically referring to this
case, the position of the petitioners is that the bank deposit of judgment debtor B & B Forest
Development Corporation cannot be subject to garnishment to satisfy a final judgment against
it in view of the aforequoted provisions of law.
We do not view the situation in that light. The lower court did not order an examination of or
inquiry into the deposit of B & B Forest Development Corporation, as contemplated in the law.
It merely required Tan Kim Liong to inform the court whether or not the defendant B & B Forest
Development Corporation had a deposit in the China Banking Corporation only for purposes of
the garnishment issued by it, so that the bank would hold the same intact and not allow any
withdrawal until further order. It will be noted from the discussion of the conference committee
110
report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405,
that it was not the intention of the lawmakers to place bank deposits beyond the reach of
execution to satisfy a final judgment. Thus:
Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the Committee
on Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held
liable by the Bureau of Internal Revenue for, say, P1,000.00 worth of tax liability, and because
of this the deposit of this individual is attached by the Bureau of Internal Revenue.
Mr. RAMOS. The attachment will only apply after the court has pronounced sentence
declaring the liability of such person. But where the primary aim is to determine whether he has
a bank deposit in order to bring about a proper assessment by the Bureau of Internal Revenue,
such inquiry is not authorized by this proposed law.
Mr. MARCOS. But under our rules of procedure and under the Civil Code, the attachment or
garnishment of money deposited is allowed. Let us assume, for instance, that there is a
preliminary attachment which is for garnishment or for holding liable all moneys deposited
belonging to a certain individual, but such attachment or garnishment will bring out into the
open the value of such deposit. Is that prohibited by this amendment or by this law?
Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the inquiry
is made only for the purpose of satisfying a tax liability already declared for the protection of
the right in favor of the government; but when the object is merely to inquire whether he has a
deposit or not for purposes of taxation, then this is fully covered by the law.
Mr. MARCOS. And it protects the depositor, does it not?
Mr. RAMOS. Yes, it protects the depositor.
Mr. MARCOS. The law prohibits a mere investigation into the existence and the amount of the
deposit.
Mr. RAMOS. Into the very nature of such deposit.
Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment or
attachment of the deposit is not allowed?
Mr. RAMOS. No, without judicial authorization.
Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as well as
the substantive law on the matter is amended?
Mr. RAMOS. Yes. That is the effect.
Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the liability of
an individual for taxation purposes and this judgment is sought to be executed ... in the
execution of that judgment, does this bill, or this proposed law, if approved, allow the
investigation or scrutiny of the bank deposit in order to execute the judgment?
Mr. RAMOS. To satisfy a judgment which has become executory.
Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and the deposit
is half a million, will this bill allow scrutiny into the deposit in order that the judgment may be
executed?
Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation to the
Government, but not to determine whether a deposit has been made in evasion of taxes.
xxx xxx xxx
Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery of a
sum of money the plaintiff wishes to attach the properties of the defendant to insure the
satisfaction of the judgment. Once the judgment is rendered, does the gentleman mean that
the plaintiff cannot attach the bank deposit of the defendant?
Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to which I
replied that outside the very purpose of this law it could be reached by attachment.
Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?
Mr. RAMOS. That is so.
(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840, July 27, 1955).
It is sufficiently clear from the foregoing discussion of the conference committee report of the
two houses of Congress that the prohibition against examination of or inquiry into a bank
deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of
a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is
disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that
it was ever within the intention of Congress to enable debtors to evade payment of their just
111
debts, even if ordered by the Court, through the expedient of converting their assets into cash
and depositing the same in a bank.
WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby
affirmed, with costs against the petitioners-appellants.
G.R. No. 138967 April 24, 2007
LEIDEN E. FERNANDEZ, GLORIA B. ADRIANO, EMELDA A. NEGAPATAN, JESUS P. TOMONGHA,
ELEONOR A. QUIANOLA, ASTEMA C. CAMPO, FLORIDA VILLACERAN, FLORIDA B. TALLEDO
AND BRENDA GADIANO, Petitioners,
vs.
NICASIO C. ANION, the Labor Arbiter of the Regional Arbitration Branch VII-Cebu City;
MARGUERITE LHUILLIER; and ALVAREZ CAETE LOPEZ PANGANDOYON AHAT & PAREDES
LAW OFFICES, represented by ATTY. WILFREDO S. PANGANDOYON, JR., Respondents.
DECISION
GARCIA, J.:
The instant petition is a proceeding for contempt in connection with the execution of a final and
executory Decision1 of this Court in G.R. No. 105892, entitled Leiden E. Fernandez, et al., v.
National Labor Relations Commission, et al., a labor case involving the illegal dismissal of herein
petitioners by respondent Marguerite Lhuillier from their employment at Agencia Cebuana-H.
Lhuillier Pawnshop (Agencia Cebuana, hereafter), of which the latter is the sole proprietor. Via
the present recourse, petitioners pray the Court to hold the respondents guilty of civil and
criminal contempts for failure to comply with and implement the Decision of the Court in G.R.
No. 105892. They also seek the inhibition of respondent Labor Arbiter Nicasio C. Anion from
taking part in further execution proceedings relative to the same case, and request that a final
computation be made by the Court of the exact amount of the monetary awards due them
under the same Decision.
Stripped to the bare essentials, the material facts briefly stated as follows:
In 1990, petitioners filed their respective complaints against respondent Marguerite Lhuillier
and/or Agencia Cebuana with the Regional Arbitration Branch VII, Cebu City, for illegal dismissal,
service incentive pay, reinstatement with full back wages, and damages. Their complaints were
consolidated and assigned to then Labor Arbiter Gavino Velasquez, Jr. who, in a decision2 dated
August 30, 1991, found for the petitioners, to wit:
WHEREFORE, judgment is hereby rendered in favor of the complainants [petitioners] and
against the respondent. The respondent is hereby ordered:
1. To reinstate the complainants to their respective position at the Agencia Cebuana with full
back wages without qualifications; if reinstatement is not feasible, for one reason or another, to
pay to the complainants their respective separation pay, service incentive leave pay with full
back wages without qualification computed hereunder as follows:
xxx xxx xxx
2. To pay to all the complainants the amount of P100,000.00 for moral damages and the amount
of another P100,000.00 for exemplary damages, plus the amount of P98,018.25 as attorneys
fees representing 10% of the total award and the amount of P30,000.00 for litigation expenses.
Claiming denial of due process, respondent Marguerite Lhuillier appealed to the National Labor
Relations Commission (NLRC), in connection with which she filed a cash bond of 748,411.34.
In a decision dated March 11, 1992, the NLRC vacated the decision of Labor Arbiter Velasquez,
Jr. and remanded the case to the Regional Arbitration Branch VII, Cebu City, for further
proceedings.
Following the NLRCs denial of their motion for reconsideration, petitioners went to this Court
on a petition for certiorari in G.R. 105892.1awphi1.nt
In a Decision3 promulgated on January 28, 1998, the Court granted the certiorari petition,
reversed and set aside the assailed decision and resolution of the NLRC and reinstated with
modifications the decision of Labor Arbiter Velasquez, Jr., thus:
WHEREFORE, the petition is hereby GRANTED and the assailed Decision and Resolution are
REVERSED and SET ASIDE. The labor arbiters decision is REINSTATED with MODIFICATIONS, such
that the award of separation pay is deleted and the service incentive leave pay is computed from
December 16, 1975 up to the petitioners actual reinstatement. Full back wages, including the
accrued thirteenth month pay, are also awarded to the nine petitioners - - Leiden Fernandez,
Brenda Gadiano, Gloria Adriano, Emelia Negapatan, Jesus Tomongha, Eleonor Quianola,
Asteria Campo, Florida Villaceran and Florida Talledo - - from the date of their illegal dismissal
to the time of their actual reinstatement. Petitioners Lim and Canonigo, whom we find to have
voluntarily resigned, are not entitled to any benefit.
SO ORDERED.
112
On April 28, 1998, the Decision became final and executory and an Entry of Judgment was made
thereon in the Book of Entries of Judgment.
What transpired next lies at the core of the instant petition for contempt.
On April 8, 1999, herein public respondent Labor Arbiter Nicasio C. Anion, by way enforcing
this Courts Decision in G.R. No. 105892, issued a writ of execution4 commanding the Deputy
Sheriff to:
x x x REINSTATE the complainants [petitioners] at the respondent Agencia Cebuana and to
proceed to the premises of the respondent located at Calderon St., Cebu City or wherever the
same could be found and collect from the respondent the sum of P3,505,092.33 representing
complainants award plus execution fee of P34,550.92 and the deposit fee of P17,535.46 or a
total sum of P3,556,178.71 and thereafter turn over the said sum to this Office for appropriate
disposition. Should you fail to collect said sum in cash, you are hereby authorized to cause the
satisfaction of the same on the movable or immovable properties of the respondent not exempt
from execution.
On April 15 and 16, 1999, the Deputy Sheriff, garnished the Citibank and Metrobank accounts
of respondent Marguerite Lhuillier and levied on a parcel of land belonging to her located in
Mandaue City.
On April 20, 1999, petitioners filed with the same Regional Arbitration Branch VII, Cebu City, a
motion for the release to them of respondents cash bond earlier posted by her in connection
with her appeal to the NLRC from the adverse decision of Labor Arbiter Velasquez, Jr. On the
very same day, respondent Labor Arbiter Anion issued an Order directing the release of the
cash bond to the petitioners. Petitioners received the amount of 748,411.34.
Then, on May 14, 1999, respondents Alvarez Caete Lopez Pangandoyon Ahat & Paredes Law
Offices, through respondent Atty. Wilfredo S. Pangandoyon, Jr., filed with Labor Arbiter Nicasio
C. Anion, on behalf of Marguerite Lhuillier, a motion5 to lift or set aside the writ of garnishment
alleging that the garnished accounts were not in the name of Marguerite Lhuillier alone but were
joint accounts with Christopher Darza and Claudine Darza. The motion further claims that the
writ of execution was directed only against Agencia Cebuana, hence, not even Marguerite
Lhuillier can be made personally liable thereunder.
Petitioners vigorously opposed the motion to lift, arguing that respondents Alvarez Caete
Lopez Pangandoyon Ahat & Paredes Law Offices have no legal personality to represent
Margruerite Lhuillier as they are not her counsels on record. Petitioners point out that the
counsels on record for Marguerite Lhuillier are Atty. Amadeo D. Seno and Atty. Luis V. Diores
and that there had been no proper substitution of counsel made. Moreover, petitioners claim
in the same opposition that the garnished bank accounts are not joint accounts but are accounts
only in the name of Marguerite Lhuillier, who, contrary to the allegations in the motion, is just
as liable under the writ as Agencia Cebuana.
In a resolution dated June 10, 1999, respondent Labor Arbiter Nicasio C. Anion granted the
motion to lift or set aside the writ of garnishment and directed the Deputy Sheriff to enforce
this Courts Decision in G.R. No. 105892 only on the properties of Agencia Cebuana.
On June 21, 1999, petitioners appealed the aforementioned resolution of Labor Arbiter Ainon
to the NLRC. Subsequently, they also filed with this Court the instant petition for "civil and
criminal contempt and other disciplinary sanctions; inhibition of the respondent labor arbiter;
final computation of the exact figure of petitioners monetary awards including separation pay;
with request to consolidate petitioners recent appeal filed with the [NLRC] to this instant
petition." In sum, petitioners submit that the collective acts of the public and private
respondents constitute contempt of this Court in that they thwarted the implementation of the
final and executory Decision of the Court in G.R. No. 105892.
First off, it greatly saddens the Court that petitioner employees, who were illegally dismissed
way back in 1990 -- seventeen (17) years before this date -- have yet to be fully compensated
for the injustice that had befallen them almost two decades ago despite the final and executory
judgment of this very Court in their favor. It is in the interests of justice, therefore, that the Court
must make conclusive clarifications as to the execution of its final Decision against respondent
Marguerite Lhuillier.
In an individual proprietorship, the owner has unlimited personal liability for all the debts and
obligations of the business.6 As sole proprietor of Agencia Cebuana, from whose employment
the petitioners were unlawfully removed, Marguerite Lhuillier is the party against whom the
Courts final and executory Decision in G.R. No. 105892 is enforceable. Put differently,
Marguerite Lhuillier is personally liable under the same Decision. Garnishment and levy over her
property are proper in the dispensation of justice.
Be that as it may, we do not find, however, any contumacious act to have been committed by
both the public and private respondents, either individually or collectively. As it were, there was
never an attempt on their part to subvert or hold at bay the final implementation of the
executory Decision of the Court in the main case. Quite the contrary, recognizing the executory
character of this Courts Decision in question, respondent Labor Arbiter Nicasio Anion issued a
writ of execution for its implementation. For their part, the private respondents did not actually
or maliciously resist the writ thus issued. What they opposed was the garnishment of the bank
accounts allegedly jointly owned by respondent Marguerite Lhuillier and two others, not the
113
writ of execution itself. We hold, however, that such accounts, even if joint as claimed by the
private respondents, are subject to garnishment. It is in the nature of joint accounts that anyone
of the depositors has access to the entire funds therein. If, afterwards, there should be
squabbling amongst the supposed joint depositors as to the share of each, they can sort it out
amongst themselves.
deserved fruits of their labor. As regards the companion request of the petitioners for a final
computation by the Court of the exact amounts of monetary awards due them under the same
Decision, the Court is not inclined to venture thereon considering that said computation had
already been done by Labor Arbiter Velasquez, Jr., in his decision of March 11, 1992, as affirmed
with modifications by the Court in its Decision in G.R. No. 105892.

We reiterate for the purpose of clarity that private respondent Marguerite Lhuillier is personally IN VIEW WHEREOF, and finding no contumacious act on the part of the herein respondents, the
liable under this Courts Decision in dispute. Her co-respondent Agencia Cebuana is a sole instant petition is DISMISSED but the respondent Labor Arbiter Nicasio C. Ainon is DIRECTED
proprietorship without a juridical personality of its own. But while the position taken by the to IMMEDIATELY IMPLEMENT this Courts Decision in G.R. No. 105892.
public and private respondents that the judgment in question is not enforceable against
respondent Marguerite Lhuillier, but solely against Agencia Cebuana is wrong, they are not liable No Costs.
for contempt.
SO ORDERED.
For one, the filing of the respondent law firm of Alvarez Caete Lopez Pangandoyon Ahat &
Paredes Law Offices of its motion to lift the order of garnishment cannot be adjudged
contumacious simply because they do not appear as counsel of record of respondent Marguerite
Lhuillier/Agencia Cebuana. Their engagement to file that particular motion does not appear to
be a replacement or substitution of counsel where the withdrawal or consent of former counsel
is required. There was no intention on their part to replace or substitute the counsels on record
of Marguerite Lhuillier and/or Agencia Cebuana. For sure, the services of the counsels on record
were never terminated. In this light, we are inclined to believe that the engagement of the law
firm of Alvarez Caete Lopez Pangandoyon & Paredes Law Offices appears to have been on
collaborative effort basis. Besides, it is settled rule in our jurisdiction that a lawyer is presumed
to be properly authorized to represent any cause in which he appears.7 It is hard to imagine that
the respondent law firm who has no personal interest in the case would fight for and defend a
case with persistence and vigor if it had not been authorized or employed by the party
concerned.8 Besides, it must be stressed that the respondent law firm merely filed a motion to
lift the order of garnishment, an appearance which is basically limited in character.

On the part of the respondent Labor Arbiter, it appears clear to us that it was never his intent
to defy the final and executory Decision of this Court in the main case, much less to delay its
enforcement. He did, after all, issue a writ of execution on April 8, 1999. Not only that. When
the petitioners filed their motion for the release to them of respondents cash bond in
connection with her appeal to the NLRC from the earlier adverse decision of Labor Arbiter
Velasquez Jr., respondent Labor Arbiter Nicasio C. Anion issued an order directing such release
that very same day and petitioners did receive the amount of 748,411.34. Hence, the Decision
of this Court in question had, in fact, already been partially executed. For this reason, we do not
see the need for the inhibition of Labor Arbiter Nicasio Anion in the enforcement process of
the same Decision. He is, however, directed with all dispatch to satisfy the final and executory
Decision of this Court in G.R. No. 105892. The petitioners have waited long enough for the justly

114

G.R. No. 170290 April 11, 2012
PHILIPPINE DEPOSIT INSURANCE CORPORATION, Petitioner,
vs.
CITIBANK, N.A. and BANK OF AMERICA, S.T. & N.A., Respondents.
DECISION
MENDOZA, J.:
This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing
the October 27, 2005 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 61316, entitled
"Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit Insurance Corporation."
The Facts
Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality
created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No. 9302.2
Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of America,
S.T. & N.A. (BA) is a national banking association, both of which are duly organized and existing
under the laws of the United States of America and duly licensed to do business in the
Philippines, with offices in Makati City.3
In 1977, PDIC conducted an examination of the books of account of Citibank. It discovered that
Citibank, in the course of its banking business, from September 30, 1974 to June 30, 1977,
received from its head office and other foreign branches a total of 11,923,163,908.00 in dollars,
covered by Certificates of Dollar Time Deposit that were interest-bearing with corresponding
maturity dates.4 These funds, which were lodged in the books of Citibank under the account
"Their Account-Head Office/Branches-Foreign Currency," were not reported to PDIC as deposit
liabilities that were subject to assessment for insurance.5 As such, in a letter dated March 16,
1978, PDIC assessed Citibank for deficiency in the sum of 1,595,081.96.6
Similarly, sometime in 1979, PDIC examined the books of accounts of BA which revealed that
from September 30, 1976 to June 30, 1978, BA received from its head office and its other foreign
branches a total of 629,311,869.10 in dollars, covered by Certificates of Dollar Time Deposit
that were interest-bearing with corresponding maturity dates and lodged in their books under
the account "Due to Head Office/Branches."7 Because BA also excluded these from its deposit
liabilities, PDIC wrote to BA on October 9, 1979, seeking the remittance of 109,264.83
representing deficiency premium assessments for dollar deposits.8
Believing that litigation would inevitably arise from this dispute, Citibank and BA each filed a
petition for declaratory relief before the Court of First Instance (now the Regional Trial Court)
of Rizal on July 19, 1979 and December 11, 1979, respectively.9 In their petitions, Citibank and
BA sought a declaratory judgment stating that the money placements they received from their
head office and other foreign branches were not deposits and did not give rise to insurable
deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the PDIC Charter) and, as a
consequence, the deficiency assessments made by PDIC were improper and erroneous.10 The
cases were then consolidated.11
On June 29, 1998, the Regional Trial Court, Branch 163, Pasig City (RTC) promulgated its
Decision12 in favor of Citibank and BA, ruling that the subject money placements were not
deposits and did not give rise to insurable deposit liabilities, and that the deficiency assessments
issued by PDIC were improper and erroneous. Therefore, Citibank and BA were not liable to pay
the same. The RTC reasoned out that the money placements subject of the petitions were not
assessable for insurance purposes under the PDIC Charter because said placements were
deposits made outside of the Philippines and, under Section 3.05(b) of the PDIC Rules and
Regulations,13 such deposits are excluded from the computation of deposit liabilities. Section
3(f) of the PDIC Charter likewise excludes from the definition of the term "deposit" any
obligation of a bank payable at the office of the bank located outside the Philippines. The RTC
further stated that there was no depositor-depository relationship between the respondents
and their head office or other branches. As a result, such deposits were not included as third-
party deposits that must be insured. Rather, they were considered inter-branch deposits which
were excluded from the assessment base, in accordance with the practice of the United States
Federal Deposit Insurance Corporation (FDIC) after which PDIC was patterned.
Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in its October 27, 2005
Decision. In so ruling, the CA found that the money placements were received as part of the
banks internal dealings by Citibank and BA as agents of their respective head offices. This
showed that the head office and the Philippine branch were considered as the same entity. Thus,
no bank deposit could have arisen from the transactions between the Philippine branch and the
head office because there did not exist two separate contracting parties to act as depositor and
depositary.14 Secondly, the CA called attention to the purpose for the creation of PDIC which
was to protect the deposits of depositors in the Philippines and not the deposits of the same
bank through its head office or foreign branches.15 Thirdly, because there was no law or
115
jurisprudence on the treatment of inter-branch deposits between the Philippine branch of a
foreign bank and its head office and other branches for purposes of insurance, the CA was
guided by the procedure observed by the FDIC which considered inter-branch deposits as non-
assessable.16 Finally, the CA cited Section 3(f) of R.A. No. 3591, which specifically excludes
obligations payable at the office of the bank located outside the Philippines from the definition
of a deposit or an insured deposit. Since the subject money placements were made in the
respective head offices of Citibank and BA located outside the Philippines, then such placements
could not be subject to assessment under the PDIC Charter.17
Hence, this petition.
The Issues
PDIC raises the issue of whether or not the subject dollar deposits are assessable for insurance
purposes under the PDIC Charter with the following assigned errors:
A.
The appellate court erred in ruling that the subject dollar deposits are money placements, thus,
they are not subject to the provisions of Republic Act No. 6426 otherwise known as the "Foreign
Currency Deposit Act of the Philippines."
B.
The appellate court erred in ruling that the subject dollar deposits are not covered by the PDIC
insurance.18
Respondents similarly identify only one issue in this case:
Whether or not the money placements subject matter of these petitions are assessable for
insurance purposes under the PDIC Act.19
The sole question to be resolved in this case is whether the funds placed in the Philippine branch
by the head office and foreign branches of Citibank and BA are insurable deposits under the
PDIC Charter and, as such, are subject to assessment for insurance premiums.
The Courts Ruling
The Court rules in the negative.
A branch has no separate legal personality;
Purpose of the PDIC
PDIC argues that the head offices of Citibank and BA and their individual foreign branches are
separate and independent entities. It insists that under American jurisprudence, a banks head
office and its branches have a principal-agent relationship only if they operate in the same
jurisdiction. In the case of foreign branches, however, no such relationship exists because the
head office and said foreign branches are deemed to be two distinct entities.20 Under Philippine
law, specifically, Section 3(b) of R.A. No. 3591, which defines the terms "bank" and "banking
institutions," PDIC contends that the law treats a branch of a foreign bank as a separate and
independent banking unit.21
The respondents, on the other hand, initially point out that the factual findings of the RTC and
the CA, with regard to the nature of the money placements, the capacity in which the same were
received by the respondents and the exclusion of inter-branch deposits from assessment, can
no longer be disturbed and should be accorded great weight by this Court.22 They also argue
that the money placements are not deposits. They postulate that for a deposit to exist, there
must be at least two parties a depositor and a depository each with a legal personality
distinct from the other. Because the respondents respective head offices and their branches
form only a single legal entity, there is no creditor-debtor relationship and the funds placed in
the Philippine branch belong to one and the same bank. A bank cannot have a deposit with
itself.23
This Court is of the opinion that the key to the resolution of this controversy is the relationship
of the Philippine branches of Citibank and BA to their respective head offices and their other
foreign branches.
The Court begins by examining the manner by which a foreign corporation can establish its
presence in the Philippines. It may choose to incorporate its own subsidiary as a domestic
corporation, in which case such subsidiary would have its own separate and independent legal
personality to conduct business in the country. In the alternative, it may create a branch in the
Philippines, which would not be a legally independent unit, and simply obtain a license to do
business in the Philippines.24
In the case of Citibank and BA, it is apparent that they both did not incorporate a separate
domestic corporation to represent its business interests in the Philippines. Their Philippine
branches are, as the name implies, merely branches, without a separate legal personality from
their parent company, Citibank and BA. Thus, being one and the same entity, the funds placed
by the respondents in their respective branches in the Philippines should not be treated as
deposits made by third parties subject to deposit insurance under the PDIC Charter.
116
For lack of judicial precedents on this issue, the Court seeks guidance from American
jurisprudence.1wphi1 In the leading case of Sokoloff v. The National City Bank of New York,25
where the Supreme Court of New York held:
Where a bank maintains branches, each branch becomes a separate business entity with
separate books of account. A depositor in one branch cannot issue checks or drafts upon
another branch or demand payment from such other branch, and in many other respects the
branches are considered separate corporate entities and as distinct from one another as any
other bank. Nevertheless, when considered with relation to the parent bank they are not
independent agencies; they are, what their name imports, merely branches, and are subject to
the supervision and control of the parent bank, and are instrumentalities whereby the parent
bank carries on its business, and are established for its own particular purposes, and their
business conduct and policies are controlled by the parent bank and their property and assets
belong to the parent bank, although nominally held in the names of the particular branches.
Ultimate liability for a debt of a branch would rest upon the parent bank. [Emphases supplied]
This ruling was later reiterated in the more recent case of United States v. BCCI Holdings
Luxembourg26 where the United States Court of Appeals, District of Columbia Circuit,
emphasized that "while individual bank branches may be treated as independent of one
another, each branch, unless separately incorporated, must be viewed as a part of the parent
bank rather than as an independent entity."
In addition, Philippine banking laws also support the conclusion that the head office of a foreign
bank and its branches are considered as one legal entity. Section 75 of R.A. No. 8791 (The
General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act Liberalizing the Entry of
Foreign Banks) both require the head office of a foreign bank to guarantee the prompt payment
of all the liabilities of its Philippine branch, to wit:
Republic Act No. 8791:
Sec. 75. Head Office Guarantee. In order to provide effective protection of the interests of the
depositors and other creditors of Philippine branches of a foreign bank, the head office of such
branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the Philippines of
foreign bank shall have preferential rights to the assets of such branch in accordance with the
existing laws.
Republic Act No. 7721:
Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.
Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section 1 of
R.A. No. 3591 (The PDIC Charter) which provides:
Section 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter
referred to as the "Corporation" which shall insure, as herein provided, the deposits of all banks
which are entitled to the benefits of insurance under this Act, and which shall have the powers
hereinafter granted.
The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing
public by way of providing permanent and continuing insurance coverage on all insured
deposits.
R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the establishment
of the PDIC:
Section 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy of the
State to strengthen the mandatory deposit insurance coverage system to generate, preserve,
maintain faith and confidence in the country's banking system, and protect it from illegal
schemes and machinations.
Towards this end, the government must extend all means and mechanisms necessary for the
Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and
safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and stable
banking system at all times.
The purpose of the PDIC is to protect the depositing public in the event of a bank closure. It has
already been sufficiently established by US jurisprudence and Philippine statutes that the head
office shall answer for the liabilities of its branch. Now, suppose the Philippine branch of Citibank
suddenly closes for some reason. Citibank N.A. would then be required to answer for the deposit
liabilities of Citibank Philippines. If the Court were to adopt the posture of PDIC that the head
office and the branch are two separate entities and that the funds placed by the head office and
its foreign branches with the Philippine branch are considered deposits within the meaning of
the PDIC Charter, it would result to the incongruous situation where Citibank, as the head office,
would be placed in the ridiculous position of having to reimburse itself, as depositor, for the
117
losses it may incur occasioned by the closure of Citibank Philippines. Surely our law makers could
not have envisioned such a preposterous circumstance when they created PDIC.
Finally, the Court agrees with the CA ruling that there is nothing in the definition of a "bank" and
a "banking institution" in Section 3(b) of the PDIC Charter27 which explicitly states that the head
office of a foreign bank and its other branches are separate and distinct from their Philippine
branches.
There is no need to complicate the matter when it can be solved by simple logic bolstered by
law and jurisprudence. Based on the foregoing, it is clear that the head office of a bank and its
branches are considered as one under the eyes of the law. While branches are treated as
separate business units for commercial and financial reporting purposes, in the end, the head
office remains responsible and answerable for the liabilities of its branches which are under its
supervision and control. As such, it is unreasonable for PDIC to require the respondents, Citibank
and BA, to insure the money placements made by their home office and other branches. Deposit
insurance is superfluous and entirely unnecessary when, as in this case, the institution holding
the funds and the one which made the placements are one and the same legal entity.
Funds not a deposit under the definition
of the PDIC Charter;
Excluded from assessment
PDIC avers that the funds are dollar deposits and not money placements. Citing R.A. No. 6848,
it defines money placement as a deposit which is received with authority to invest. Because
there is no evidence to indicate that the respondents were authorized to invest the subject
dollar deposits, it argues that the same cannot be considered money placements.28 PDIC then
goes on to assert that the funds received by Citibank and BA are deposits, as contemplated by
Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar deposits were received by
Citibank and BA in the course of their banking operations from their respective head office and
foreign branches and were recorded in their books as "Account-Head Office/Branches-Time
Deposits" pursuant to Central Bank Circular No. 343 which implements R.A. No. 6426; (2) the
dollar deposits were credited as dollar time accounts and were covered by Certificates of Dollar
Time Deposit which were interest-bearing and payable upon maturity, and (3) the respondents
maintain 100% foreign currency cover for their deposit liability arising from the dollar time
deposits as required by Section 4 of R.A. No. 6426.29
To refute PDICs allegations, the respondents explain the inter-branch transactions which
necessitate the creation of the accounts or placements subject of this case. When the Philippine
branch needs to procure foreign currencies, it will coordinate with a branch in another country
which handles foreign currency purchases. Both branches have existing accounts with their head
office and when a money placement is made in relation to the acquisition of foreign currency
from the international market, the amount is credited to the account of the Philippine branch
with its head office while the same is debited from the account of the branch which facilitated
the purchase. This is further documented by the issuance of a certificate of time deposit with a
stated interest rate and maturity date. The interest rate represents the cost of obtaining the
funds while the maturity date represents the date on which the placement must be returned.
On the maturity date, the amount previously credited to the account of the Philippine branch is
debited, together with the cost for obtaining the funds, and credited to the account of the other
branch. The respondents insist that the interest rate and maturity date are simply the basis for
the debit and credit entries made by the head office in the accounts of its branches to reflect
the inter-branch accommodation.30 As regards the maintenance of currency cover over the
subject money placements, the respondents point out that they maintain foreign currency cover
in excess of what is required by law as a matter of prudent banking practice.31
PDIC attempts to define money placement in order to impugn the respondents claim that the
funds received from their head office and other branches are money placements and not
deposits, as defined under the PDIC Charter. In the process, it loses sight of the important issue
in this case, which is the determination of whether the funds in question are subject to
assessment for deposit insurance as required by the PDIC Charter. In its struggle to find an
adequate definition of "money placement," PDIC desperately cites R.A. No. 6848, The Charter
of the Al-Amanah Islamic Investment Bank of the Philippines. Reliance on the said law is
unfounded because nowhere in the law is the term "money placement" defined. Additionally,
R.A. No. 6848 refers to the establishment of an Islamic bank subject to the rulings of Islamic
Sharia to assist in the development of the Autonomous Region of Muslim Mindanao (ARMM),32
making it utterly irrelevant to the case at bench. Since Citibank and BA are neither Islamic banks
nor are they located anywhere near the ARMM, then it should be painfully obvious that R.A. No.
6848 cannot aid us in deciding this case.
Furthermore, PDIC heavily relies on the fact that the respondents documented the money
placements with certificates of time deposit to simply conclude that the funds involved are
deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment for
deposit insurance. It is this kind of reasoning that creates non-existent obscurities in the law and
obstructs the prompt resolution of what is essentially a straightforward issue, thereby causing
this case to drag on for more than three decades.1wphi1
Noticeably, PDIC does not dispute the veracity of the internal transactions of the respondents
which gave rise to the issuance of the certificates of time deposit for the funds the subject of
the present dispute. Neither does it question the findings of the RTC and the CA that the money
placements were made, and were payable, outside of the Philippines, thus, making them fall
under the exclusions to deposit liabilities. PDIC also fails to impugn the truth of the testimony
118
of John David Shaffer, then a Fiscal Agent and Head of the Assessment Section of the FDIC, that
inter-branch deposits were excluded from the assessment base. Therefore, the determination
of facts of the lower courts shall be accepted at face value by this Court, following the well-
established principle that factual findings of the trial court, when adopted and confirmed by the
CA, are binding and conclusive on this Court, and will generally not be reviewed on appeal.33
As explained by the respondents, the transfer of funds, which resulted from the inter-branch
transactions, took place in the books of account of the respective branches in their head office
located in the United States. Hence, because it is payable outside of the Philippines, it is not
considered a deposit pursuant to Section 3(f) of the PDIC Charter:
Sec. 3(f) The term "deposit" means the unpaid balance of money or its equivalent received by a
bank in the usual course of business and for which it has given or is obliged to give credit to a
commercial, checking, savings, time or thrift account or which is evidenced by its certificate of
deposit, and trust funds held by such bank whether retained or deposited in any department of
said bank or deposit in another bank, together with such other obligations of a bank as the Board
of Directors shall find and shall prescribe by regulations to be deposit liabilities of the Bank;
Provided, that any obligation of a bank which is payable at the office of the bank located outside
of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of
the total deposits or of the insured deposits; Provided further, that any insured bank which is
incorporated under the laws of the Philippines may elect to include for insurance its deposit
obligation payable only at such branch. [Emphasis supplied]
The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC, after
which PDIC was modelled, is also persuasive. Inter-branch deposits refer to funds of one branch
deposited in another branch and both branches are part of the same parent company and it is
the practice of the FDIC to exclude such inter-branch deposits from a banks total deposit
liabilities subject to assessment.34
All things considered, the Court finds that the funds in question are not deposits within the
definition of the PDIC Charter and are, thus, excluded from assessment.
WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of Appeals in
CA-G.R. CV No. 61316 is AFFIRMED.
G.R. No. 176438 January 24, 2011
PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), Petitioner,
vs.
PHILIPPINE COUNTRYSIDE RURAL BANK, INC., RURAL BANK OF CARMEN (CEBU), INC., BANK
OF EAST ASIA (MINGLANILLA, CEBU), INC., and PILIPINO RURAL BANK (CEBU), INC.,
Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by the
Philippine Deposit Insurance Corporation (PDIC) assailing the September 18, 2006 Decision of
the Court of Appeals-Cebu (CA-Cebu), which granted the petition for injunction filed by
respondents Philippine Countryside Rural Bank, Inc. (PCRBI), Rural Bank of Carmen (Cebu), Inc.
(RBCI), Bank of East Asia (Minglanilla, Cebu), Inc. (BEAI), and Pilipino Rural Bank (Cebu), Inc.
(PRBI), all collectively referred to as "Banks." The dispositive portion of the CA-Cebu decision
reads:
WHEREFORE, in view of all the foregoing premises, the petition for injunction is hereby
GRANTED. The respondent PDIC is restrained from further conducting investigations or
examination on petitioners-banks without the requisite approval from the Monetary Board.
SO ORDERED.1
In a resolution dated January 25, 2007, the CA-Cebu denied petitioners motion for
reconsideration for "lack of merit."2
THE FACTS
On March 9, 2005, the Board of Directors of the PDIC (PDIC Board) adopted Resolution No. 2005-
03-0323 approving the conduct of an investigation, in accordance with Section 9(b-1) of Republic
Act (R.A.) No. 3591, as amended, on the basis of the Reports of Examination of the Bangko
Sentral ng Pilipinas (BSP) on ten (10) banks, four (4) of which are respondents in this petition for
119
review. The said resolution also created a Special Investigation Team to conduct the said
investigation, with the authority to administer oaths, to examine, take and preserve testimony
of any person relating to the subject of the investigation, and to examine pertinent bank records.
On May 25, 2005, the PDIC Board adopted another resolution, Resolution No. 2005-05-056,4
approving the conduct of an investigation on PCRBI based on a Complaint-Affidavit filed by a
corporate depositor, the Philippine School of Entrepreneurship and Management (PSEMI)
through its president, Jacinto L. Jamero.
On June 3, 2005, in accordance with the two PDIC Board resolutions, then PDIC President and
Chief Executive Officer Ricardo M. Tan issued the Notice of Investigation5 to the President or
The Highest Ranking Officer of PCRBI.
On June 7, 2005, the PDIC Investigation Team personally served the Notice of Investigation on
PCRBI at its Head Office in Pajo, Lapu-Lapu City.6
According to PDIC, in the course of its investigation, PCRBI was found to have granted loans to
certain individuals, which were settled by way of dacion of properties. These properties,
however, had already been previously foreclosed and consolidated under the names of PRBI,
BEAI and RBCI.7
On June 15, 2005, PDIC issued similar notices of investigation to PRBI8 and BEAI.9
The notices stated that the investigation was to be conducted pursuant to Section 9 (b-1) of the
PDIC Charter and upon authority of PDIC Board Resolution No. 2005-03-032 authorizing the
twelve (12) named representatives of PDIC to conduct the investigation.10
The investigation was sought because the Banks were found to be among the ten (10) banks
collectively known as "Legacy Banks." The Reports of General and Special Examinations of the
BSP as of June 30, 2004, disclosed, among others, that the Legacy Banks were commonly owned
and/or controlled by Legacy Plans Inc. (now Legacy Consolidated Plans, Inc.), and Celso
Gancayco delos Angles, Jr. and his family.11
The notice of investigation was served on PRBI the next day, June 16, 2005.12
On June 25, 2005, a separate notice of investigation13 was served on RBCI. The latter provided
the PDIC Investigation Team with certified copies of the loan documents they had requested,
until its president received an order directing him not to allow the investigation.14
Subsequently, PRBI and BEAI refused entry to their bank premises and access to their records
and documents by the PDIC Investigation Team, upon advice of their respective counsels.15
On June 16 and 17, 2005, Atty. Victoria G. Noel (Atty. Noel) of the Tiongson & Antenor Cruz Law
Office sent letters to the PDIC16 informing it of her legal advice to PCRBI and BEAI not to submit
to PDIC investigation on the ground that its investigatory power pursuant to Section 9(b-1) of
R.A. No. 3591, as amended (An Act Establishing The Philippine Deposit Insurance Corporation,
Defining Its Powers And Duties And For Other Purposes), cannot be differentiated from the
examination powers accorded to PDIC under Section 8, paragraph 8 of the same law, under
which, prior approval from the Monetary Board is required.
On June 17, 2005, PDIC General Counsel Romeo M. Mendoza sent a reply to Atty. Noel stating
that "PDICs investigation power, as distinguished from the examination power of the PDIC
under Section 8 of the same law, does not need prior approval of the Monetary Board."17 PDIC
then urged PRBI and BEAI "not to impede the conduct of PDICs investigation" as the same
"constitutes a violation of the PDIC Charter for which PRBI and BEAI may be held criminally
and/or administratively liable."18
On June 27 and 28, 2005, the Banks, through counsel, sought further clarification from PDIC on
its source of authority to conduct the impending investigations and requested that PDIC refrain
from proceeding with the investigations.19
Simultaneously, the Banks wrote to the Monetary Board requesting a clarification on the
parameters of PDICs power of investigation/examination over the Banks and for an issuance of
a directive to PDIC not to pursue the investigations pending the requested clarification.20
On June 28, 2005, PRBI and BEAI again received letters from PDIC, dated June 24, 2005, which
appeared to be final demands on them to allow its investigation.21 PRBI and BEAI replied that
letters of clarification had been sent to PDIC and the Monetary Board.22 Pending action on such
requests, PDIC was requested to refrain from proceeding with the investigation.23
Notwithstanding, on July 11, 2005, the Banks received a letter, dated July 8, 2005, from the PDIC
General Counsel reiterating its position that prior Monetary Board approval was not a pre-
requisite to PDICs exercise of its investigative power.24
Not in conformity, on July 28, 2005, the Banks filed a Petition for Declaratory Relief with a Prayer
for the Issuance of a TRO and/or Writ of Preliminary Injunction (RTC Petition) before the
Regional Trial Court of Makati (RTC-Makati) which was docketed as Civil Case No. 05-697.25
120
In the RTC Petition, the Banks prayed for a judgment interpreting Section 9(b-1) of the PDIC
Charter, as amended, to require prior Monetary Board approval before PDIC could exercise its
investigation/examination power over the Banks.26
PDIC filed a motion to dismiss alleging that the RTC had no jurisdiction over the said petition
since a breach had already been committed by the Banks when they received the notices of
investigation, and because PDIC need not secure prior Monetary Board approval since
"examination" and "investigation" are two different terms.27
Later, the Banks withdrew their application for a temporary restraining order (TRO) reasoning
that lower courts cannot issue injunctions against PDIC. Thus, the Banks instituted a petition for
injunction with application for TRO and/or Preliminary Injunction (CA-Manila petition) before
the Court of Appeals-Manila (CA-Manila). The case was docketed as CA-G.R. SP No. 91038.28
Even before the CA-Manila could rule on the application for a TRO and/or writ of preliminary
injunction, the RTC-Makati dismissed the petition on the ground that there already existed a
breach of law that isolated the case from the jurisdiction of the trial court.29
The Banks filed a motion for reconsideration but it was denied by the RTC for lack of merit.30
On February 10, 2006, the Banks filed a notice of appeal31 which they later withdrew on
February 28, 2006.32
In view of the dismissal of the RTC-Makati petition, the CA-Manila dismissed the petition for
injunction for being moot and academic. In its Decision, dated February 1, 2006,33 the CA-
Manila wrote:
What remained for the petitioners to do was to litigate over the breach or violation by ordinary
action, as the circumstances ensuing from the breach or violation warrant. The ordinary action
may either be in the same case, if the RTC permitted the conversion, in which event the RTC
may allow the parties to file such pleadings as may be necessary or proper, pursuant to Sec. 5,
Rule 63; or the petitioners may file another action in the proper court (e.g. including the Court
of Appeals, should injunction be among the reliefs to be sought) upon some cause of action that
has arisen from the breach or violation.34
Thereafter, on March 14, 2006, the Banks filed their Petition for Injunction with Prayer for
Preliminary Injunction35 (CA-Cebu Petition) with the CA-Cebu (CA-Cebu).
On March 15, 2006, the CA-Cebu issued a resolution granting the Banks application for a TRO.
This enjoined the PDIC, its representatives or agents or any other persons or agency assisting
them or acting for and in their behalf from conducting examinations/investigations on the
Banks head and branch offices without securing the requisite approval from the Monetary
Board of BSP.36
During the pendency of the CA-Cebu petition, PDIC filed with this Court a Petition for Certiorari,
Prohibition and Mandamus with Prayer for Issuance of Temporary Restraining Order and/or
Writ of Preliminary Injunction under Rule 65 docketed as G.R. No. 173370.37 It alleged that the
CA-Cebu committed grave abuse of discretion amounting to lack or excess of jurisdiction in
taking cognizance of the Banks petition, and in issuing a TRO and a writ of preliminary
injunction.38
On July 31, 2006, this Court issued a resolution dismissing the petition for certiorari in G.R. No.
173370. The Resolution reads:
Considering the allegations, issues and arguments adduced in the petition for certiorari,
prohibition and mandamus with prayer for preliminary injunction and/or restraining order
dated 19 July 2006, the Court resolves to DISMISS the petition for failure to sufficiently show
that the questioned resolution of the Court of Appeals is tainted with grave abuse of discretion.
Moreover, the petition failed to conform with Rule 65 and other related provisions of the 1997
Rules of Civil Procedure, as amended, governing petitions for certiorari, prohibition and
mandamus filed with the Supreme Court, since petitioner failed to submit a verified statement
of material date of receipt of the assailed resolution dated 16 May 2006 in accordance with
Section 4, Rule 65 in relation to the second paragraph of Section 3, Rule 46. In any event, the
petition is premature since no motion for reconsideration of the questioned resolution of the
Court of Appeals was filed prior to the availment of this special civil action and there are no
sufficient allegations to bring the case within the recognized exceptions to this rule.39
On September 18, 2006, after both parties had submitted their respective memoranda, the CA-
Cebu rendered a decision granting the writ of preliminary injuction,40 pertinent portions of
which read:
[A]fter undergoing a series of amendments, the controlling law with respect to PDICs power to
conduct examination of banks is-prior approval of the Monetary Board is a condition sine qua
non for PDIC to exercise its power of examination. To rule otherwise would disregard the
amendatory law of the PDICs charter.
The Court is not also swayed by the contention of respondent that what it seeks to conduct is
an investigation and not an examination of petitioners transactions, hence prior approval of the
Monetary Board is a mere surplusage.
121
The ordinary definition of the words "examination" and "investigation" would lead one to
conclude that both pertain to the same thing and there seems to be no fine line differentiating
one from the other. Blacks Law Dictionary defines the word "investigate" as "to examine and
inquire into with care and accuracy; to find out by careful inquisition; examination and the word
"examination" as an investigation. In Collins Dictionary of Banking and Finance, the word
"investigation" is defined as an "examination to find out what is wrong."
In the case of Anti-Graft League of the Philippines, Inc. vs. Hon. Ortega, et al.,41 the Supreme
Court using Ballentines Law Dictionary defines an "investigation" as an inquiry, judicial or
otherwise, for the discovery or collection of facts concerning the matter or matters involved.
Such common definitions would show that there is really nothing to distinguish between these
two (2) terms as to support the PDIC view differentiating Section 9 (b-1) from paragraph 8,
Section 8 of the PDIC Charter.
In the realm of the PDIC rules, specifically under Section 3 of PDIC Regulatory Issuance No. 2205-
0242 "investigation" is defined as: Investigation shall refer to fact-finding examination, study,
inquiry, for determining whether the allegations in a complaint or findings in a final report of
examination may properly be the subject of an administrative, criminal or civil action.
From the foregoing definition alone, it can be easily deduced that investigation and examination
are synonymous terms. Simply stated, investigation encompasses a fact-finding examination.
Thus, it is inconsistent with the rules if respondent PDIC be (sic) allowed to conduct an
investigation without the approval of the Monetary Board.
Moreover, the Court sees that the rationale of the law in requiring a (sic) prior approval from
the Monetary Board whenever an examination or in this case an investigation needs to be
conducted by the PDIC is obviously to ensure that there is no overlapping of efforts, duplication
of functions and more importantly to provide a check and balance to the otherwise unrestricted
power of respondent PDIC to conduct investigations on banks insured by it.
With the foregoing premises, this Court rules that a prior approval from the Monetary Board is
necessary before respondent PDIC can proceed with its investigations on petitioners-banks.43
PDIC moved for reconsideration but it was denied in a resolution dated January 25, 2007.44
Hence, this petition.
THE ISSUES
I.
WHETHER RESPONDENT BANKS VIOLATED THE RULE AGAINST FORUM SHOPPING WHEN THEY
FILED THE PETITION FOR INJUNCTION BEFORE THE COURT OF APPEALS-CEBU.
II.
WHETHER THE PRONOUNCEMENT OF THE REGIONAL TRIAL COURT OF MAKATI IN THE PETITION
FOR DECLARATORY RELIEF CONSTITUTES RES JUDICATA TO THE PETITION FOR INJUNCTION IN
THE COURT OF APPEALS-CEBU.
III.
WHETHER PETITIONER WAS DEPRIVED OF ITS OPPORTUNITY TO BE HEARD WHEN THE COURT
OF APPEALS-CEBU ISSUED THE WRIT OF INJUNCTION.
IV.
WHETHER THE ISSUES RAISED BY PETITIONERS ARE THE SAME ISSUES RAISED IN G.R. NO. 173370
WHICH WAS EARLIER DISMISSED BY THIS COURT.
V.
WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT PRIOR APPROVAL OF THE
MONETARY BOARD OF THE BANGKO SENTRAL NG PILIPINAS IS NECESSARY BEFORE THE PDIC
MAY CONDUCT AN INVESTIGATION OF RESPONDENT BANKS.
THE COURTS RULING
I - Whether respondent banks violated the rule against forum shopping when they filed the
petition for injunction before the Court of Appeals-Cebu.
II - Whether the pronouncement of the Regional Trial Court of Makati in the petition for
declaratory relief constitutes res judicata to the petition for injunction in the Court of Appeals-
Cebu.
In the recent case of Sameer Oversees Placement Agency, Inc. v. Mildred R. Santos,45 the Court
discussed the matter of forum shopping:
Forum shopping is defined as an act of a party, against whom an adverse judgment or order has
been rendered in one forum, of seeking and possibly getting a favorable opinion in another
forum, other than by appeal or special civil action for certiorari. It may also be the institution of
two or more actions or proceedings grounded on the same cause on the supposition that one
or the other court would make a favorable disposition. There is forum shopping where the
elements of litis pendentia are present, namely: (a) there is identity of parties, or at least such
parties as represent the same interest in both actions; (b) there is identity of rights asserted and
122
relief prayed for, the relief being founded on the same set of facts; and (c) the identity of the
two preceding particulars is such that any judgment rendered in the pending case, regardless of
which party is successful, would amount to res judicata in the other. It is expressly prohibited by
this Court because it trifles with and abuses court processes, degrades the administration of
justice, and congests court dockets. A willful and deliberate violation of the rule against forum
shopping is a ground for summary dismissal of the case, and may also constitute direct
contempt.46
Juxtaposing the RTC-Makati, CA-Manila and CA-Cebu petitions, what must be determined here,
is whether the elements of litis pendentia are present between and among these petitions, i.e.
whether (a) there is identity of parties, or at least such parties as represent the same interest in
both actions; (b) there is identity of rights asserted and relief prayed for, the relief being founded
on the same set of facts; and (c) the identity of the two preceding particulars is such that any
judgment rendered in the pending case, regardless of which party is successful, would amount
to res judicata in the other.
The first element is clearly present as between the RTC-Makati petition and the CA-Cebu
petition. Both involved the Banks on one hand, and the PDIC on the other.
The second and third elements of litis pendentia, however, are patently wanting. The rights
asserted and reliefs prayed for were different, though founded on the same set of facts. The
RTC-Makati Petition was one for declaratory relief while the CA-Manila Petition was one for
injunction with a prayer for preliminary injunction.
A petition for declaratory relief is filed by any person interested under a deed, will, contract or
other written instrument, or whose rights are affected by a statute, executive order or
regulation, ordinance, or any other governmental regulation, before breach or violation,
thereof, to determine any question of construction or validity arising, and for a declaration of
his rights or duties thereunder.47
Injunction, on the other hand, is "a judicial writ, process or proceeding whereby a party is
directed either to do a particular act, in which case it is called a mandatory injunction, or to
refrain from doing a particular act, in which case it is called a prohibitory injunction. As a main
action, injunction seeks to permanently enjoin the defendant through a final injunction issued
by the court and contained in the judgment."48
Clearly, there is a marked difference between the reliefs sought under an action for declaratory
relief and an action for injunction. While an action for declaratory relief seeks a declaration of
rights or duties, or the determination of any question or validity arising under a statute,
executive order or regulation, ordinance, or any other governmental regulation, or under a
deed, will, contract or other written instrument, under which his rights are affected, and before
breach or violation, an action for injunction ultimately seeks to enjoin or to compel a party to
perform certain acts.
Moreover, as stated in the RTC-Makati Decision, because the Banks had already breached the
provisions of law on which declaratory judgment was being sought, it was without jurisdiction
to take cognizance of the same. Any judgment rendered in the RTC-Makati petition would not
amount to res judicata in the CA-Manila Petition. Thus, the RTC was correct in dismissing the
case, having been bereft of jurisdiction to take cognizance of the action for declaratory
judgment.
As between the CA-Manila and the CA-Cebu petitions, the second and third elements of litis
pendentia are absent. The rights asserted and reliefs prayed for were different, although
founded on the same set of facts.
The CA-Manila Petition is a petition for injunction wherein the Banks prayed that:
1) Immediately upon filing of this Petition, a Writ of Preliminary Injunction and/or Temporary
Restraining Order be issued commanding the respondent and all its officers, employees and
agents to cease and desist from proceeding with the investigations sought to be conducted on
the petitioners head and branch offices while the Petition for Declaratory Relief before Branch
58 of the Makati Regional Trial Court is pending.
2) After due proceedings, judgment be rendered declaring as permanent the Writ of Preliminary
Injunction and/or Temporary Restraining Order prayed for above.
Other equitable reliefs are likewise prayed for.49
[Underscoring supplied]
The CA-Cebu Petition, on the other hand, is denominated as a Petition for Injunction With Prayer
for Writ of Preliminary Injunction and/or Restraining Order. The Banks prayed therein that:
1) Upon filing of this Petition, a Writ of Preliminary Injunction and/or Temporary Restraining
Order be issued forthwith, enjoining Respondent PDIC and all its officers, employees and agents
to cease and desist from conducting examinations/investigations on Petitioner Banks head and
branch offices without securing the requisite approval from the Monetary Board of the Bangko
Sentral ng Pilipinas, as required by Sec. 8, Paragraph 8 of the PDIC Charter, as amended;
123
2) After due proceedings, judgment be rendered declaring as permanent the Writ of Preliminary
Injunction and/or Temporary Restraining Order prayed for above.
Other equitable reliefs are likewise prayed for.50
As can be gleaned from the above-cited portions of the CA-Manila and CA-Cebu petitions, the
petitions seek different reliefs.
Therefore, as between and among the RTC Makati, and the CA-Manila and CA-Cebu petitions,
there is no forum shopping.
III - Whether petitioner was deprived of its opportunity to be heard when the Court of Appeals-
Cebu issued the writ of injunction.
PDIC alleges that the CA-Cebu, in issuing the TRO in its March 15, 2006 Resolution, and
subsequently, the preliminary injunction in its May 16, 2006 Resolution, violated the
fundamental rule that courts should avoid issuing injunctive relief which would in effect dispose
of the main case without trial.51 PDIC argues that a TRO is intended only as a restraint until the
propriety of granting a temporary injunction can be determined, and it goes no further than to
preserve the status until that determination.52 Moreover, its purpose is merely to suspend
proceedings until such time when there may be an opportunity to inquire whether any
injunction should be granted, and it is not intended to operate as an injunction pendente lite,
and should not, in effect, determine the issues involved before the parties can have their day in
court, or give an advantage to either party by proceeding in the acquisition or alteration of the
property the right to which is disputed while the hands of the other party are tied.53
On the other hand, the Banks claim that PDIC was given every opportunity to present its
arguments against the issuance of the injunction.54 Its active participation in the proceedings
negates its assertion that it was denied procedural due process in the issuance of the writ of
injunction.55 Citing Salonga v. Court of Appeals,56 the Banks state that the essence of due
process is the reasonable opportunity to be heard and to submit evidence one may have in
support of ones defense,57 and PDIC was able to do so.
On March 15, 2006, the CA-Cebu issued a resolution granting their prayer for a 60-day TRO, and
requiring PDIC to file its comment.58 The latter thereafter filed its Comment ad Cautelam dated
March 30, 2006.59 [Underscoring ours]
On May 16, 2006, the CA-Cebu issued another resolution, this time granting the prayer for a
preliminary injunction and requiring the parties to file their respective memoranda. PDIC
thereafter filed its memorandum dated July 31, 2006.60
On September 18, 2006, the CA-Cebu promulgated its Decision granting the Petition for
Injunction.61 PDIC filed a motion for reconsideration dated October 10, 2006,62 which was
subsequently denied.
The essence of procedural due process is found in the reasonable opportunity to be heard and
submit ones evidence in support of his defense.63 The Court finds that procedural due process
was observed by the CA-Cebu. The parties were afforded equal opportunity to present their
arguments. In the absence of any indication to the contrary, the CA-Cebu must be accorded the
presumption of regularity in the performance of their functions. However, as discussed herein,
the matter of whether it erred in its conclusion and issuance of the TRO, preliminary injunction
and final injunction is another matter altogether.
IV Whether the issues raised by petitioner are the same issues raised in G.R. No. 173370 which
was earlier dismissed by this Court.
In G.R. 173370, a petition for certiorari under Rule 65 of the Rules of Court, PDIC alleged that
the CA-Cebu committed grave abuse of discretion amounting to lack or excess of jurisdiction in
taking cognizance of the Banks petition, and in issuing a TRO and a writ of preliminary
injunction.64
In the case at bench, a petition for review under Rule 45, PDICs core contention is that the CA-
Cebu erred in finding that prior approval of the Monetary Board of the BSP is necessary before
it may conduct an investigation of the Banks.
Clearly then, the two petitions were of different nature raising different issues.
G.R. 173370 challenged the CA-Cebus having taken cognizance of the Banks petition and
interlocutory orders on the issuance of a TRO and a writ of preliminary injunction. This case,
however, strikes at the core of the final decision on the merits of the CA-Cebu, and not merely
the interlocutory orders. While both G.R. 173370 and the present case may have been anchored
on the same set of facts, that is, the refusal of the Banks to allow PDIC to conduct an
investigation without the prior consent of the Monetary Board, the issues raised in the two
petitions are not identical. Moreover, the disposal of the first case does not amount to res
judicata in this case.
V Whether the Court of Appeals-Cebu erred in finding that prior approval of the Monetary
Board of the Bangko Sentral ng Pilipinas is necessary before the PDIC may conduct an
investigation of respondent banks.
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PDIC is of the position that in order for it to exercise its power of investigation, the law requires
that:
(a) The investigation is based on a complaint of a depositor or any other government agency, or
on the report of examination of [the] Bangko Sentral ng Pilipinas (BSP) and/or PDIC; and,
(b) The complaint alleges, or the BSP and/or PDIC Report of Examination contains adverse
findings of, fraud, irregularities or anomalies committed by the Bank and/or its directors,
officers, employees or agents; and,
(c) The investigation is upon the authority of the PDIC Board of Directors.65
It argues that when it commenced its investigation on the Banks, all of the aforementioned
requirements were met. PDIC stresses that its power of examination is different from its power
of investigation, in such that the former requires prior approval of the Monetary Board while
the latter requires merely the approval of the PDIC Board.66 It further claims that the power of
examination cannot be exercised within twelve (12) months from the last examination
conducted, whereas the power of investigation is without limitation as to the frequency of its
conduct. It states that the purpose of the PDICs power of examination is merely to look into the
condition of the bank, whereas the power of investigation aims to address fraud, irregularities
and anomalies based on complaints from depositors and other government agencies or upon
reports of examinations conducted by the PDIC itself or by the BSP.67
The Banks, on the other hand, are of the opinion that a holistic reading of the PDIC charter shows
that petitioners power of examination is synonymous with its power of investigation.68 They
cite, as bases, the law dictionary definitions, Section 8, Eighth paragraph69 and Section 9(b-1)70
of the PDIC Charter, and Rule 1, Section 3(1) of PDIC Regulatory Issuance No. 2005-02, which
defines "investigation" as follows:
(l) Investigation shall refer to fact-finding examination, study or inquiry for determining
whether the allegations in a complaint or findings in a final report of examination may properly
be the subject of an administrative, criminal or civil action.
The Banks further cite Section X658 of the Manual of Regulations for Banks, which states:
Sec. X658 - Examination by the BSP. The term examination shall, henceforth, refer to an
investigation of an institution under the supervisory authority of the BSP to determine
compliance with laws and regulations. It shall include determination that the institution is
conducting its business on a safe and sound basis. Examination requires full and comprehensive
looking into the operations and books of institutions, and shall include, but need not be limited
to the following:
a. Determination of the banks solvency and liquidity position;
b. Evaluation of asset quality as well as determination of sufficiency of valuation reserves on
loans and other risk assets;
c. Review of all aspects of bank operations;
d. Assessment of risk management system, including the evaluation of the effectiveness of the
bank managements oversight functions, policies, procedures, internal control and audit;
e. Appraisal of overall management of the bank;
f. Review of compliance and applicable laws, rules and regulations; and any other activities
relevant to the above."
After an evaluation of the respective positions of the parties, the Court is of the view that the
Monetary Board approval is not required for PDIC to conduct an investigation on the Banks.
The disagreement stems from the interpretation of these two key provisions of the PDIC Charter.
The confusion can be attributed to the fact that although "investigation" and "examination" are
two separate and distinct procedures under the charter of the PDIC and the BSP, the words seem
to be used loosely and interchangeably.
It does not help that indeed these terms are very closely related in a generic sense. However,
while "examination" connotes a mere generic perusal or inspection, "investigation" refers to a
more intensive scrutiny for a more specific fact-finding purpose. The latter term is also usually
associated with proceedings conducted prior to criminal prosecution.
The PDIC was created by R.A. No. 3591 on June 22, 1963 as an insurer of deposits in all banks
entitled to the benefits of insurance under the PDIC Charter to promote and safeguard the
interests of the depositing public by way of providing permanent and continuing insurance
coverage of all insured deposits. It is a government instrumentality that operates under the
Department of Finance. Its primary purpose is to act as deposit insurer, as a co-regulator of
banks, and as receiver and liquidator of closed banks.71
Section 1 of the PDIC Charter states:
125
SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter
referred to as the "Corporation" which shall insure, as herein provided, the deposits of all banks
which are entitled to the benefits of insurance under this Act, and which shall have the powers
hereinafter granted.
The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing
public by way of providing permanent and continuing insurance coverage on all insured
deposits.
Section 1 of R.A. No. 9576 further provides: An Act Increasing the Maximum Deposit Insurance
Coverage, and in connection therewith, to Strengthen the Regulatory and Administrative
Authority, and Financial Capability of the Philippine Deposit Insurance Corporation (PDIC),
amending for this purpose R.A. No. 3591, as Amended, otherwise known as the PDIC Charter.
SECTION 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy of
the State to strengthen the mandatory deposit insurance coverage system to generate,
preserve, maintain faith and confidence in the countrys banking system, and protect it from
illegal schemes and machinations.
Towards this end, the government must extend all means and mechanisms necessary for the
Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and
safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and stable
banking system at all times.1wphi1
Under its charter, the PDIC is empowered to conduct examination of banks with prior approval
of the Monetary Board:
Eighth To conduct examination of banks with prior approval of the Monetary Board: Provided,
That no examination can be conducted within twelve (12) months from the last examination
date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral,
conduct a special examination as the Board of Directors, by an affirmative vote of a majority of
all its members, if there is a threatened or impending closure of a bank; Provided, further, That,
notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426,
as amended, Republic Act No. 8791, and other laws, the Corporation and/or the Bangko Sentral,
may inquire into or examine deposit accounts and all information related thereto in case there
is a finding of unsafe or unsound banking practice; Provided, That to avoid overlapping of efforts,
the examination shall maximize the efficient use of the relevant reports, information, and
findings of the Bangko Sentral, which it shall make available to the Corporation; (As amended
by R.A. 9302, 12 August 2004, R.A. 9576, 1 June 2009)
xxx. [Underlining supplied]
Section 9(b-1) of the PDIC Charter further provides that the PDIC Board shall have the power to:
POWERS AND RESPONSIBILITIES AND PROHIBITIONS
SECTION 9. xxx
(b) The Board of Directors shall appoint examiners who shall have power, on behalf of the
Corporation to examine any insured bank. Each such examiner shall have the power to make a
thorough examination of all the affairs of the bank and in doing so, he shall have the power to
administer oaths, to examine and take and preserve the testimony of any of the officers and
agents thereof, and, to compel the presentation of books, documents, papers, or records
necessary in his judgment to ascertain the facts relative to the condition of the bank; and shall
make a full and detailed report of the condition of the bank to the Corporation. The Board of
Directors in like manner shall appoint claim agents who shall have the power to investigate and
examine all claims for insured deposits and transferred deposits. Each claim agent shall have the
power to administer oaths and to examine under oath and take and preserve testimony of any
person relating to such claim. (As amended by E.O. 890, 08 April 1983; R.A. 7400, 13 April 1992)
(b-1) The investigators appointed by the Board of Directors shall have the power on behalf of
the Corporation to conduct investigations on frauds, irregularities and anomalies committed in
banks, based on reports of examination conducted by the Corporation and Bangko Sentral ng
Pilipinas or complaints from depositors or from other government agency. Each such
investigator shall have the power to administer oaths, and to examine and take and preserve
the testimony of any person relating to the subject of investigation. (As added by R.A. 9302, 12
August 2004)
xxx. [Underscoring supplied]
As stated above, the charter empowers the PDIC to conduct an investigation of a bank and to
appoint examiners who shall have the power to examine any insured bank. Such investigators
are authorized to conduct investigations on frauds, irregularities and anomalies committed in
banks, based on an examination conducted by the PDIC and the BSP or on complaints from
depositors or from other government agencies.
The distinction between the power to investigate and the power to examine is emphasized by
the existence of two separate sets of rules governing the procedure in the conduct of
investigation and examination. Regulatory Issuance (RI) No. 2005-02 or the PDIC Rules on Fact-
126
Finding Investigation of Fraud, Irregularities and Anomalies Committed in Banks covers the
procedural requirements of the exercise of the PDICs power of investigation. On the other hand,
RI No. 2009-05 sets forth the guidelines for the conduct of the power of examination.
The definitions provided under the two aforementioned regulatory issuances elucidate on the
distinction between the power of examination and the power of investigation.
Section 2 of RI No. 2005-02 states that its coverage shall be applicable to "all fact-finding
investigations on fraud, irregularities and/or anomalies committed in banks that are conducted
by PDIC based on: [a] complaints from depositors or other government agencies; and/or [b] final
reports of examinations of banks conducted by the Bangko Sentral ng Pilipinas and/or PDIC."
The same issuance states that the Final Report of Examination72 is one of the three pre-
requisites to the conduct of an investigation, in addition to the authorization of the PDIC
Board73 and a complaint.74 Juxtaposing this provision with Section 9(b-1) of the PDIC Charter,
since an examination is explicitly made the basis of a fact-finding examination, then clearly
examination and investigation are two different proceedings. It would obviously defy logic to
make the result of an "investigation" the basis of the same proceeding. Thus, RI No. 2005-02
defines an "investigation" as a "fact-finding examination, study or inquiry for determining
whether the allegations in a complaint or findings in a final report of examination may properly
be the subject of an administrative, criminal or civil action."75
The Banks cite the dictionary definitions of "examination" and "investigation" to justify their
conclusion that these terms refer to one and the same proceeding. It is tempting to use these
two terms interchangeably, which practice may be perfectly justified in a purely literary sense.
Indeed, a reading of the PDIC Charter shows that the two terms have been used interchangeably
at some point. However, based on the provisions aforecited, the intention of the laws is clearly
to differentiate between the process of investigation and that of examination.
In 2009, to clarify procedural matters, PDIC released RI No. 2009-05 or the Rules and Regulations
on Examination of Banks. Section 2 thereof differentiated between the two types of examination
as follows:
Section 2. Types of Examination
a. Regular Examination - An examination conducted independently or jointly with the BSP. It
requires the prior approval of the PDIC Board of Directors and the Monetary Board (MB). It may
be conducted only after an interval of at least twelve (12) months from the closing date of the
last Regular Examination.
b. Special Examination An examination conducted at any time in coordination with the BSP,
by an affirmative vote of a majority of all the members of the PDIC Board of Directors, without
need of prior MB approval, if there is a threatened or impending bank closure as determined by
the PDIC Board of Directors. [Underscoring supplied]
Section 3 of RI No. 2009-05 provides for the general scope of the PDIC examination:
Section 3. Scope of Examination
The examination shall include, but need not be limited to, the following:
a. Determination of the banks solvency and liquidity position;
b. Evaluation of asset quality as well as determination of sufficiency of valuation reserves on
loans and other risk assets;
c. Review of all aspects of bank operations;
d. Assessment of risk management system, including the evaluation of the effectiveness of the
bank managements oversight functions, policies, procedures, internal control and audit;
e. Appraisal of overall management of the bank;
f. Review of compliance with applicable banking laws, and rules and regulations, including PDIC
issuances;
g. Follow-through of specific exceptions/ violations noted during a previous examination; and
h. Any other activity relevant to the above.
Rule 2, Section 1 of PDIC RI No. 2005-02 or the PDIC Rules on Fact-Finding Investigation of Fraud,
Irregularities and Anomalies Committed in Banks provides for the scope of fact-finding
investigations as follows:
SECTION 1. Scope of the Investigation.
Fact-finding Investigations shall be limited to the particular acts or omissions subject of a
complaint or a Final Report of Examination.
From the above-cited provisions, it is clear that the process of examination covers a wider scope
than that of investigation.
Examination involves an evaluation of the current status of a bank and determines its
compliance with the set standards regarding solvency, liquidity, asset valuation, operations,
systems, management, and compliance with banking laws, rules and regulations.
127
Investigation, on the other hand, is conducted based on specific findings of certain acts or
omissions which are subject of a complaint or a Final Report of Examination.

Clearly, investigation does not involve a general evaluation of the status of a bank. An
investigation zeroes in on specific acts and omissions uncovered via an examination, or which
are cited in a complaint.

An examination entails a review of essentially all the functions and facets of a bank and its
operation. It necessitates poring through voluminous documents, and requires a detailed
evaluation thereof. Such a process then involves an intrusion into a banks records.

In contrast, although it also involves a detailed evaluation, an investigation centers on specific

acts of omissions and, thus, requires a less invasive assessment.

The practical justification for not requiring the Monetary Board approval to conduct an
investigation of banks is the administrative hurdles and paperwork it entails, and the
correspondent time to complete those additional steps or requirements. As in other types of
investigation, time is always of essence, and it is prudent to expedite the proceedings if an
accurate conclusion is to be arrived at, as an investigation is only as precise as the evidence on
which it is based. The promptness with which such evidence is gathered is always of utmost
importance because evidence, documentary evidence in particular, is remarkably fungible. A
PDIC investigation is conducted to "determine[e] whether the allegations in a complaint or
findings in a final report of examination may properly be the subject of an administrative,
criminal or civil action."76 In other words, an investigation is based on reports of examination
and an examination is conducted with prior Monetary Board approval. Therefore, it would be
unnecessary to secure a separate approval for the conduct of an investigation. Such would
merely prolong the process and provide unscrupulous individuals the opportunity to cover their
tracks.

Indeed, while in a literary sense, the two terms may be used interchangeably, under the PDIC
Charter, examination and investigation refer to two different processes. To reiterate, an
examination of banks requires the prior consent of the Monetary Board, whereas an
investigation based on an examination report, does not.

WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court of Appeals in
CA G.R. CEB SP. No. 01550, dated September 18, 2006 and January 25, 2007 are REVERSED and
SET ASIDE.

SO ORDERED.

128
III. Loan Function

Richelle Ann Zamora

129
 G.R. No. 189871 August 13, 2013 Date Dismissed = January 24, 1997
Rate per day = 196.00
DARIO NACAR, PETITIONER, Date of Decisions = Aug. 18, 1998
vs. a) 1/24/97 to 2/5/98 = 12.36 mos.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS. 196.00/day x 12.36 mos. = 62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
DECISION Prevailing Rate per day = 62,986.00
198.00 x 26 days x 6.4 mos. = 32,947.20
PERALTA, J.: TOTAL = 95.933.76
xxxx
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of
the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
denying petitioners motion for reconsideration. constructive dismissal and are therefore, ordered:

The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch
of the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF)
and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (95,933.36) representing his backwages; and

On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found All other claims are hereby dismissed for lack of merit.
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount of 158,919.92. SO ORDERED.4
The dispositive portion of the decision, reads:
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5
With the foregoing, we find and so rule that respondents failed to discharge the burden of dated February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter.
showing that complainant was dismissed from employment for a just or valid cause. All the Respondents filed a motion for reconsideration, but it was denied.6
more, it is clear from the records that complainant was never afforded due process before he
was terminated. As such, we are perforce constrained to grant complainants prayer for the Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
payments of separation pay in lieu of reinstatement to his former position, considering the 2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
strained relationship between the parties, and his apparent reluctance to be reinstated, Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.7
computed only up to promulgation of this decision as follows:
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
SEPARATION PAY no reversible error on the part of the CA, this Court denied the petition in the Resolution dated
Date Hired = August 1990 April 17, 2002.8
Rate = 198/day
Date of Decision = Aug. 18, 1998 An Entry of Judgment was later issued certifying that the resolution became final and executory
Length of Service = 8 yrs. & 1 month on May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
198.00 x 26 days x 8 months = 41,184.00 conference was consequently scheduled, but respondents failed to appear.10
BACKWAGES

130
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of
the Resolution of the Supreme Court on May 27, 2002.11 Upon recomputation, the
Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of
471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff
to collect from respondents the total amount of 471,320.31. Respondents filed a Motion to
Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded
separation pay of 62,986.56 and limited backwages of 95,933.36, no more recomputation is
required to be made of the said awards. They claimed that after the decision becomes final and
executory, the same cannot be altered or amended anymore.14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on
January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17
granting the appeal in favor of the respondents and ordered the recomputation of the judgment
award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to
be final and executory. Consequently, another pre-execution conference was held, but
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total
amount of only 147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the
original amount as determined by the Labor Arbiter in his Decision dated October 15, 1998,
pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of 147,560.19, which petitioner eventually
received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the
amount of 11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that
should be enforced considering that it was the one that became final and executory. However,
the Labor Arbiter reasoned that since the decision states that the separation pay and backwages
are computed only up to the promulgation of the said decision, it is the amount of 158,919.92
that should be executed. Thus, since petitioner already received 147,560.19, he is only entitled
to the balance of 11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said judgment. Consequently,
it can no longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated
October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in
the Labor Arbiters decision, the same is not final until reinstatement is made or until finality of
the decision, in case of an award of separation pay. Petitioner maintains that considering that
the October 15, 1998 decision of the Labor Arbiter did not become final and executory until the
April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of
Entries on May 27, 2002, the reckoning point for the computation of the backwages and
131
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment
of interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are "computed only up to [the]
promulgation of this decision," and considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
158,919.92. Respondents added that it was only during the execution proceedings that the
petitioner questioned the award, long after the decision had become final and executory.
Respondents contend that to allow the further recomputation of the backwages to be awarded
to petitioner at this point of the proceedings would substantially vary the decision of the Labor
Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the
propriety of the computation of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct feature of the judgment of
the Labor Arbiter in the above-cited case that the decision already provided for the computation
of the payable separation pay and backwages due and did not further order the computation of
the monetary awards up to the time of the finality of the judgment. Also in Session Delights, the
dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the
labor arbiter's original computation of the awards made, pegged as of the time the decision was
rendered and confirmed with modification by a final CA decision, is legally proper. The question
is posed, given that the petitioner did not immediately pay the awards stated in the original
labor arbiter's decision; it delayed payment because it continued with the litigation until final
judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the
way the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay
in lieu of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already in
the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the
other hand, posit that a re-computation is necessary because the relief in an illegal dismissal
decision goes all the way up to reinstatement if reinstatement is to be made, or up to the finality
of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had
taken place, also made a computation of the award, is understandable in light of Section 3, Rule
VIII of the then NLRC Rules of Procedure which requires that a computation be made. This
Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case and
implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner appealed
the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC
decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded
its authority in affirming the payment of 13th month pay and indemnity, lapsed to finality and
was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-
computed; he apparently read the figures originally ordered to be paid to be the computation
due had the case been terminated and implemented at the labor arbiter's level. Thus, the labor
arbiter re-computed the award to include the separation pay and the backwages due up to the
finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor
132
arbiter's approved computation went beyond the finality of the CA decision (July 29, 2003) and
included as well the payment for awards the final CA decision had deleted - specifically, the
proportionate 13th month pay and the indemnity awards. Hence, the CA issued the decision
now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as
we discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of
the illegal dismissal, computed as of the time of the labor arbiter's original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to
be executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the
Labor Arbiter in that decision.29 A recomputation (or an original computation, if no previous
computation has been made) is a part of the law specifically, Article 279 of the Labor Code and
the established jurisprudence on this provision that is read into the decision. By the nature of
an illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under
Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment of the final decision
being implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the Labor
Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in no uncertain
terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that the employment relationship ended
so that separation pay and backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing
legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution
No. 796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series
of 1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the
pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.
133
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum
- as reflected in the case of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will
now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that
the new rate could only be applied prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any
money, goods or credits, including those for loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July
1, 2013, said judgments shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997
up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and
executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month
pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full
satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision. SO ORDERED.
134
 G.R. No. 148753 July 30, 2004
NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R. DEE
Present: and ARCELITA M. DEE, Petitioners, Panganiban, J, Chairman, Sandoval-Gutierrez,
Corona
vs
Carpio Morales, JJ
PHILIPPINE NATIONAL BANK, Promulgated:
Respondent.
DECISION
PANGANIBAN, J.:
Courts have the authority to strike down or to modify provisions in promissory notes that grant
the lenders unrestrained power to increase interest rates, penalties and other charges at the
latters sole discretion and without giving prior notice to and securing the consent of the
borrowers. This unilateral authority is anathema to the mutuality of contracts and enable
lenders to take undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure
statements issued by banks, even if stipulated in the promissory notes, cannot be given effect
under the Truth in Lending Act.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the
June 20, 2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 55231. The decretal
portion of the assailed Decision reads as follows:
WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated
December 28, 1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the mortgaged
properties of defendants-appellees[4] and the February 26, 1992 auction sale are declared legal
and valid and said defendants-appellees are ordered to pay plaintiff-appellant PNB,[5] jointly
and severally[,] the amount of deficiency that will be computed by the trial court based on the
original penalty of 6% per annum as explicitly stated in the loan documents and to pay attorneys
fees in an amount equivalent to x x x 1% of the total amount due and the costs of suit and
expenses of litigation.[6]
The Facts
The facts are narrated by the CA as follows:
On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner]
NSBCI [1)] authorizing the company to x x x apply for or secure a commercial loan with the PNB
in an aggregate amount of P8.0M, under such terms agreed by the Bank and the NSBCI, using or
mortgaging the real estate properties registered in the name of its President and Chairman of
the Board [Petitioner] Eduardo R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to
secure the loan and to sign any [and all] documents which may be required by [Respondent]
PNB[,] and that [petitioner-spouses] shall act as sureties or co-obligors who shall be jointly and
severally liable with [Petitioner] NSBCI for the payment of any [and all] obligations.
On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent]
PNB thru its Board NSBCI for an P8 Million loan broken down into a revolving credit line of P7.7M
and an unadvised line of P0.3M for additional operating and working capital to mobilize its
various construction projects, namely:
1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.
The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3)
parcels of residential land located at Mangaldan, Pangasinan with total land area of 1,214 square
meters[,] including improvements thereon and registered under TCT Nos. 128449, 126071, and
126072 of the Registry of Deeds of Pangasinan; b) six (6) parcels of residential land situated at
San Fabian, Pangasinan with total area of 1,767 square meters[,] including improvements
thereon and covered by TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and 121127 of
the Registry of Deeds of Pangasinan; and c) a residential lot and improvements thereon located
at Mangaldan, Pangasinan with an area of 4,437 square meters and covered by TCT No. 140378
of the Registry of Deeds of Pangasinan.
The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee
and Arcelita Marquez Dee, who signed as accommodation-mortgagors since all the collaterals
were owned by them and registered in their names.
135
Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated
June 29, 1989 in the amount of P5,000,000.00 with due date on October 27, 1989; [b)]
promissory note dated September 1, 1989 in the amount of P2,700,000.00 with due date on
December 30, 1989; and c) promissory note dated September 6, 1989 in the amount of
P300,000.00 with maturity date on January 4, 1990.
In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989
relating to the revolving credit line of P7.7 Million x x x and the Credit Agreement dated
September 5, 1989 to support the unadvised line of P300,000.00.
On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement (JSA) in favor
of [Respondent] PNB unconditionally and irrevocably binding themselves to be jointly and
severally liable with the borrower for the payment of all sums due and payable to the Bank
under the Credit Document.
Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes.
On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the
Branch Manager of the PNB Dagupan Branch requesting for a 90-day extension for the payment
of interests and restructuring of its loan for another term.
Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks aggregating
P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount of P200,000.00;
2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3) check no.
03499998 dated August 15, 1991 in the amount of P150,000.00.[8]
In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly Cruzabra,
was informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB post-
dated checks covering interests, penalties and part of the loan principals of his due account.
On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo Dee[,]
informing him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided the total payment
should be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal,
P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of
post-dated checks to be dated not later than November 29, 1991.
On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his
proposals for the settlement of [Petitioner] NSBCIs past due loan account amounting to
P7,019,231.33.
[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks aggregating
P1,111,306.67 in favor of [Respondent] PNB, viz:
Check No. Date Amount
03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57
Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29
and October 29, 1991 were dishonored by the drawee bank and returned due [to] a stop
payment order from [petitioners].
On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that
unless the dishonored checks [were] made good, said PNB branch shall recall its
recommendation to the Head Office for the restructuring of the loan account and refer the
matter to its legal counsel for legal action.[] [Petitioners] did not heed [respondents] warning
and as a result[,] the PNB Dagupan Branch sent demand letters to [Petitioner] NSBCI at its office
address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its past
due loan account.
[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them
and as a result, [Respondent] PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a
Petition for Sale under Act 3135, as amended[,] and Presidential Decree No. 385 dated January
30, 1992.
The notice of extra-judicial sale of the mortgaged properties relating to said PNBs [P]etition for
[S]ale was published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian, allegedly
a newspaper of general circulation in the Province of Pangasinan, including the cities of Dagupan
and San Carlos. In addition[,] copies of the notice were posted in three (3) public places[,] and
copies thereof furnished [Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps.
Eduardo and Arcelita Dee at 213 Wilson St., San Juan, Metro Manila.
On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan
foreclosed the real estate mortgage and sold at public auction the mortgaged properties of
[petitioner-spouses,] with [Respondent] PNB being declared the highest bidder for the amount
of P10,334,000.00.
136
On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered mail to
[petitioner] corporations address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City
and [petitioner-spouses] address at 213 Wilson St., San Juan, Metro Manila.
On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address
at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the
properties securing their loan account [had] been sold at public auction, that the Sheriffs
Certificate of Sale had been registered with the Registry of Deeds of Pangasinan on March 13,
1992[,] and that a period of one (1) year therefrom [was] granted to them within which to
redeem their properties.
[Petitioners] failed to redeem their properties within the one-year redemption period[,] and so
[Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in
its name. TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the Registry of
Deeds of Pangasinan.
On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale
conducted on February 26, 1992 were not sufficient to cover its total claim amounting to
P12,506,476.43[,] and thus demanded from the latter the deficiency of P2,172,476.43 plus
interest and other charges[,] until the amount [was] fully paid.
[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to
institute the instant [C]omplaint for the collection of its deficiency claim.
Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the
benefits under the program, the court a quo ruled in favor of [petitioners] in its Decision dated
December 28, 1995, the fallo of which reads:
In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of
action against the [petitioners].
WHEREFORE, the case is hereby DISMISSED, without costs.[9]
On appeal, respondent assailed the trial courts Decision dismissing its deficiency claim on the
mortgage debt. It also challenged the ruling of the lower court that Petitioner NSBCIs loan
account was bloated, and that the inadequacy of the bid price was sufficient to set aside the
auction sale.
Ruling of the Court of Appeals
Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondents
debt relief package (DRP) or take steps to comply with the conditions for qualifying under the
program. The appellate court also ruled that entitlement to the program was not a matter of
right, because such entitlement was still subject to the approval of higher bank authorities,
based on their assessment of the borrowers repayment capability and satisfaction of other
requirements.
As to the misapplication of loan payments, the CA held that the subsidiary ledgers of NSBCIs
loan accounts with respondent reflected all the loan proceeds as well as the partial payments
that had been applied either to the principal or to the interests, penalties and other charges.
Having been made in the ordinary and usual course of the banking business of respondent, its
entries were presumed accurate, regular and fair under Section 5(q) of Rule 131 of the Rules of
Court. Petitioners failed to rebut this presumption.
The increases in the interest rates on NSBCIs loan were also held to be authorized by law and
the Monetary Board and -- like the increases in penalty rates -- voluntarily and freely agreed
upon by the parties in the Credit Agreements they executed. Thus, these increases were binding
upon petitioners.
However, after considering that two to three of Petitioner NSBCIs projects covered by the loan
were affected by the economic slowdown in the areas near the military bases in the cities of
Angeles and Olongapo, the appellate court annulled and deleted the adjustment in penalty from
6 percent to 36 percent per annum. Not only did respondent fail to demonstrate the existence
of market forces and economic conditions that would justify such increases; it could also have
treated petitioners request for restructuring as a request for availment of the DRP.
Consequently, the original penalty rate of 6 percent per annum was used to compute the
deficiency claim.
The auction sale could not be set aside on the basis of the inadequacy of the auction price,
because in sales made at public auction, the owner is given the right to redeem the mortgaged
properties; the lower the bid price, the easier it is to effect redemption or to sell such right. The
bid price of P10,334,000.00 vis--vis respondents claim of P12,506,476.43 was found to be
neither shocking nor unconscionable.
The attorneys fees were also reduced by the appellate court from 10 percent to 1 percent of
the total indebtedness. First, there was no extreme difficulty in an extrajudicial foreclosure of a
real estate mortgage, as this proceeding was merely administrative in nature and did not involve
137
a court litigation contesting the proceedings prior to the auction sale. Second, the attorneys fees
were exclusive of all stipulated costs and fees. Third, such fees were in the nature of liquidated
damages that did not inure to respondents salaried counsel.
Respondent was also declared to have the unquestioned right to foreclose the Real Estate
Mortgage. It was allowed to recover any deficiency in the mortgage account not realized in the
foreclosure sale, since petitioner-spouses had agreed to be solidarily liable for all sums due and
payable to respondent.
Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction
sale were valid for the following reasons: (1) personal notice to the mortgagors, although
unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and
posted; (3) the extrajudicial sale was conducted through the deputy sheriff, under the direction
of the clerk of court who was concurrently the ex-oficio provincial sheriff and acting as agent of
respondent; (4) the sale was conducted within the province where the mortgaged properties
were located; and (5) such sale was not shown to have been attended by fraud.
Hence this Petition.[10]
Issues
Petitioners submit the following issues for our consideration:
I subsequent proceedings[,] are null and void for non-compliance with jurisdictional and other
Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of
PNBs debt relief package and were not entitled thereto as a matter of right.
II
Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the
presumption of regularity and correctness of the PNB entries in the subsidiary ledgers of the
loan accounts of petitioners.
III
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
Respondent PNB bloated the loan account of petitioner corporation by imposing interests,
penalties and attorneys fees without legal, valid and equitable justification.
IV
Whether or not the auction price at which the mortgaged properties was sold was
disproportionate to their actual fair mortgage value.
V
Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage
account not realized in the foreclosure sale, considering that:
A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which
has a separate personality from the [petitioner-spouses].
B. The joint and solidary agreement executed by [petitioner- spouses] are contracts of
adhesion not binding on them;
C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they
were compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would not grant
petitioner corporation the loan;
D. The Respondent PNB had already in its possession the properties of the [petitioner-
spouses] which served as a collateral to the loan obligation of petitioner corporation[,] and to
still allow Respondent PNB to recover the deficiency claim amounting to a very substantial
amount of P2.1 million would constitute unjust enrichment on the part of Respondent PNB.
VI
Whether or not the extrajudicial foreclosure proceedings and auction sale, including all
mandatory requirements; whether or not the petition for extrajudicial foreclosure of mortgage
was filed prematurely; and whether or not the finding of fraud by the trial court is amply
supported by the evidence on record.[11]
The foregoing may be summed up into two main issues: first, whether the loan accounts are
bloated; and second, whether the extrajudicial foreclosure and subsequent claim for deficiency
are valid and proper.
The Courts Ruling
The Petition is partly meritorious.
First Main Issue:
Bloated Loan Accounts
138
At the outset, it must be stressed that only questions of law[12] may be raised in a petition for
review on certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be
the subject of this mode of appeal,[13] for [t]he Supreme Court is not a trier of facts.[14] As
exceptions to this rule, however, factual findings of the CA may be reviewed on appeal[15]
when, inter alia, the factual inferences are manifestly mistaken;[16] the judgment is based on a
misapprehension of facts;[17] or the CA manifestly overlooked certain relevant and undisputed
facts that, if properly considered, would justify a different legal conclusion.[18] In the present
case, these exceptions exist in various instances, thus prompting us to take cognizance of factual
issues and to decide upon them in the interest of justice and in the exercise of our sound
discretion.[19]
Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with some
iniquitous imposition of interests, penalties, other charges and attorneys fees. To demonstrate
this point, the Court shall take up one by one the promissory notes, the credit agreements and
the disclosure statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be
charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third.
However, a uniform clause therein permitted respondent to increase the rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future x x x,[20]
without even giving prior notice to petitioners. The Court holds that petitioners accessory duty
to pay interest[21] did not give respondent unrestrained freedom to charge any rate other than
that which was agreed upon. No interest shall be due, unless expressly stipulated in writing.[22]
It would be the zenith of farcicality to specify and agree upon rates that could be subsequently
upgraded at whim by only one party to the agreement.
The unilateral determination and imposition[23] of increased rates is violative of the principle
of mutuality of contracts ordained in Article 1308[24] of the Civil Code.[25] One-sided
impositions do not have the force of law between the parties, because such impositions are not
based on the parties essential equality.
Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of
money on long-term contracts,[27] giving respondent an unbridled right to adjust the interest
independently and upwardly would completely take away from petitioners the right to assent
to an important modification in their agreement[28] and would also negate the element of
mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts
dependent exclusively upon the uncontrolled will[29] of respondent and was therefore void.
Besides, the pro forma promissory notes have the character of a contract dadhsion,[30] where
the parties do not bargain on equal footing, the weaker partys [the debtors] participation being
reduced to the alternative to take it or leave it.[31]
While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No.
905,[33] nothing in the said Circular grants lenders carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[34]
In fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, which
further amended the Usury Law,
authorized either party to unilaterally raise the interest rate without the others consent.[35]
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that
borrowing signified a capital transfusion from lending institutions to businesses and industries
and was done for the purpose of stimulating their growth; yet respondents continued unilateral
and lopsided policy[36] of increasing interest rates without the prior assent[37] of the borrower
not only defeats this purpose, but also deviates from this pronouncement. Although such
increases are not usurious, since the Usury Law is now legally inexistent[38] -- the interest
ranging from 26 percent to 35 percent in the statements of account[39] -- must be equitably
reduced for being iniquitous, unconscionable and exorbitant.[40] Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract thereon.[41] Above
all, it is undoubtedly against public policy to charge excessively for the use of money.[42]
It cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest
increase; there can be no implied waiver of a right when there is no clear, unequivocal and
decisive act showing such purpose.[43] Besides, the statements were not letters of information
sent to secure their conformity; and even if we were to presume these as an offer, there was no
acceptance. No one receiving a proposal to modify a loan contract, especially interest -- a vital
component -- is obliged to answer the proposal.[44]
Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for
the automatic conversion of the portion that remained unpaid after 730 days -- or two years
from date of original release -- into a medium-term loan, subject to the applicable interest rate
to be applied from the dates of original release.[45]
In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid
as of October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates --
should have been automatically converted by respondent into medium-term loans on June 30,
1991, September 2, 1991, and September 7, 1991, respectively. And on this unpaid amount
139
should have been imposed the same interest rate charged by respondent on other medium-
term loans; and the rate applied from June 29, 1989, September 1, 1989 and September 6, 1989
-- their respective original release -- until paid. But these steps were not taken. Aside from
sending demand letters, respondent did not at all exercise its option to enforce collection as of
these Notes due dates. Neither did it renew or extend the account.
In these three Promissory Notes, evidently, no complaint for collection was filed with the courts.
It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -
- with the provincial sheriff, instead.[49] Moreover, respondent did not supply the interest rate
to be charged on medium-term loans granted by automatic conversion. Because of this
deficiency, we shall use the legal rate of 12 percent per annum on loans and forbearance of
money, as provided for by CB Circular 416.[50]
Credit Agreements. Aside from the promissory notes, another main document involved in the
principal obligation is the set of credit agreements executed and their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in
evidence, and even referred to in the first Promissory Note -- cannot be given weight.
First, it was not signed by respondent through its branch manager.[52] Apparently it was
surreptitiously acknowledged before respondents counsel, who unflinchingly declared that it
had been signed by the parties on every page, although respondents signature does not appear
thereon.[53]
Second, it was objected to by petitioners,[54] contrary to the trial courts findings.[55] However,
it was not the Agreement, but the revolving credit line[56] of P5,000,000, that expired one year
from the Agreements date of implementation.[57]
Third, there was no attached annex that contained the General Conditions.[58] Even the
Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be
added to the Agreement other than those already stated therein.
Since the first Credit Agreement cannot be given weight, the interest rate on the first availment
pegged at 3 percent over and above respondents prime rate[60] on the date of such
availment[61] has no bearing at all on the loan. After the first Notes due date, the rate
of 19 percent agreed upon should continue to be applied on the availment, until its automatic
conversion to a medium-term loan.
The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondents
prime rate, plus the applicable spread[63] in effect as of the date of each availment,[64] on a
revolving credit line of P7,700,000[65] -- but did not state any provision on its increase or
decrease.[66] Consequently, petitioners could not be made to bear interest more than such
prime rate plus spread. The Court gives weight to this second Credit Agreement for the following
reasons.
First, this document submitted by respondent was admitted by petitioners.[67] Again, contrary
to their assertion, it was not the Agreement -- but the credit line -- that expired one year from
the Agreements date of implementation.[68] Thus, the terms and conditions continued to apply,
even if drawdowns could no longer be made.
Second, there was no 7-page annex[69] offered in evidence that contained the General
Conditions,[70] notwithstanding the Acknowledgment of its existence by respondents counsel.
Thus, no terms or conditions could be appended to the Agreement other than those specified
therein.
Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative
value. There was no reference to it in the Acknowledgment of the Agreement; neither was
respondents signature on any of the pages thereof. Thus, the General Conditions stipulations on
interest adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on
the Agreement. Contrary to the trial courts findings,[73] the General Condition were correctly
objected to by petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus
continued to apply to the second availment, until its automatic conversion into a medium-term
loan.
The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest
as that in the second Agreement. This rate was to be applied to availments of an unadvised line
of P300,000. Since there was no mention in the third Agreement, either, of any stipulation on
increases or decreases[76] in interest, there would be no basis for imposing amounts higher
than the prime rate plus spread. Again, the 21.5 percent rate agreed upon would continue to
apply to the third availment indicated in the third Note, until such amount was automatically
converted into a medium-term loan.
The Court also finds that, first, although this document was admitted by petitioners,[77] it was
the credit line that expired one year from the implementation of the Agreement.[78] The terms
and conditions therein continued to apply, even if availments could no longer be drawn after
expiry.
Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondents counsel affirming
its existence. Thus, the terms and conditions in this Agreement relating to interest cannot be
expanded beyond that which was already laid down by the parties.
140

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by
respondent set forth the same interest rates as those respectively indicated in the Promissory
Notes. Although no method of computation was provided showing how such rates were arrived
at, we will nevertheless take up the Statements seriatim in order
to determine the applicable rates clearly.
As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13, 1989, we
hold that the 19.5 percent effective interest rate per annum[83] would indeed apply to the first
availment or drawdown evidenced by the first Promissory Note. Not only was this Statement
issued prior to the consummation of such availment or drawdown, but the rate shown therein
can also be considered equivalent to 3 percent over and above respondents prime rate in effect.
Besides, respondent mentioned no other rate that it considered to be the prime rate chargeable
to petitioners. Even if we disregarded the related Credit Agreement, we assume that this private
transaction between the parties was fair and regular,[84] and that the ordinary course of
business was followed.[85]
As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2,
1989, we hold that the 21.5 percent effective interest rate per annum[87] would definitely apply
to the second availment or drawdown evidenced by the second Promissory Note. Incidentally,
this Statement was issued only after the consummation of its related availment or drawdown,
yet such rate can be deemed equivalent to the prime rate plus spread, as stipulated in the
corresponding Credit Agreement. Again, we presume that this private transaction was fair and
regular, and that the ordinary course of business was followed. That the related Promissory Note
was pre-signed would also bolster petitioners claim although, under cross-examination Efren
Pozon -- Assistant Department Manager I[88] of PNB, Dagupan Branch -- testified that the
Disclosure Statements were the basis for preparing the Notes.[89]
As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September 6, 1989,
we hold that the same 21.5 percent effective interest rate per annum[91] would apply to the
third
availment or drawdown evidenced by the third Promissory Note. This Statement was made
available to petitioner-spouses, only after the related Credit Agreement had been executed, but
simultaneously with the consummation of the Statements related availment or drawdown.
Nonetheless, the rate herein should still be regarded as equivalent to the prime rate plus spread,
under the similar presumption that this private transaction was fair and regular and that the
ordinary course of business was followed.
In sum, the three disclosure statements, as well as the two credit agreements considered by this
Court, did not provide for any increase in the specified interest rates. Thus, none would now be
permitted. When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan
Branch, even testified that the bases for computing such rates were those sent by the head
office from time to time, and not those indicated in the notes or disclosure statements.[92]
In addition to the preceding discussion, it is then useless to labor the point that the increase in
rates violates the impairment[93] clause of the Constitution,[94] because the sole purpose of
this provision is to safeguard the integrity of valid contractual agreements against unwarranted
interference by the State[95] in the form of laws. Private individuals intrusions on interest rates
is governed by statutory enactments like the Civil Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in any
of the clauses in the second and the third Credit Agreements[97] earlier discussed. While a
standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all
three Promissory Notes still remaining unpaid or unrenewed when they fell due,[98] there is no
stipulation therein that would justify any increase in that charges. The effect, therefore, when
the borrower is not clearly informed of the Disclosure Statements -- prior to the consummation
of the availment or drawdown -- is that the lender will have no right to collect upon such
charge[99] or increases thereof, even if stipulated in the Notes. The time is now ripe to give
teeth to the often ignored forty-one-year old Truth in Lending Act[100] and thus transform it
from a snivelling paper tiger to a growling financial watchdog of hapless borrowers.
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per
se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed
against respondent who caused it.[101] Worse, in the statements of account, the penalty rate
has again been unilaterally increased by respondent to 36 percent without petitioners consent.
As a result of its move, such
liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch[102]
for being iniquitous or unconscionable.[103]
Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution
of the transaction, it is not a contract that can be modified by the related Promissory Note, but
a mere statement in writing that reflects the true and effective cost of loans from respondent.
Novation can never be presumed,[104] and the animus novandi must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken.[105] To allow novation will surely flout the policy of the State to protect
its citizens from a lack of awareness of the true cost of credit.[106]
141
With greater reason should such penalty charges be indicated in the second and third Disclosure
Statements, yet none can be found therein. While the charges are issued after the respective
availment or drawdown, the disclosure statements are given simultaneously therewith.
Obviously, novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not warranted. No particular
values or rates of service charge are indicated in the Promissory Notes or Credit Agreements,
and no total value or even the breakdown figures of such non-finance charge are specified in
the Disclosure Statements. Moreover, the provision in the Mortgage that requires the payment
of insurance and other charges is neither made part of nor reflected in such Notes, Agreements,
or Statements.[107]
Attorneys Fees Equitably Reduced
We affirm the equitable reduction in attorneys fees.[108] These are not an integral part of the
cost of borrowing, but arise only when collecting upon the Notes becomes necessary. The
purpose of these fees is not to give respondent a larger compensation for the loan than the law
already allows, but to protect it against any future loss or damage by being compelled to retain
counsel in-house or not -- to institute judicial proceedings for the collection of its credit.[109]
Courts have has the power[110] to determine their reasonableness[111] based on quantum
meruit[112] and to reduce[113] the amount thereof if excessive.[114]
In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no
longer holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In
the same vein, their engagement of their counsel in another capacity concurrent with the
practice of law is not prohibited, so long as the roles being assumed by such counsel is made
clear to the client.[117] The only reason for this clarification requirement is that certain ethical
considerations operative in one profession may not be so in the other.[118]
Debt Relief Package
Not Availed Of
We also affirm the CAs disquisition on the debt relief package (DRP).
Respondents Circular is not an outright grant of assistance or extension of payment,[119] but a
mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected
by the economic slowdown in the peripheral areas of the then US military bases. Its allegations,
devoid of any verification, cannot lead to a supportable conclusion. In fact, for short-term loans,
there is still a need to conduct a thorough review of the borrowers repayment possibilities.[120]
Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan
value of hard collaterals,[122] to be eligible for the package. Additional accommodations on an
unsecured basis may be granted only when regular payment amortizations have been
established, or when the merits of the credit application would so justify.[123]
The branch managers recommendation to restructure or extend a total outstanding loan not
exceeding P8,000,000 is not final, but subject to the approval of respondents Branches
Department Credit Committee, chaired by its executive vice-president.[124] Aside from being
further conditioned on other pertinent policies of respondent,[125] such approval nevertheless
needs to be reported to its Board of Directors for confirmation.[126] In fact, under the General
Banking Law of 2000,[127] banks shall grant loans and other credit accommodations only in
amounts and for periods of time essential to the effective completion of operations to be
financed, consistent with safe and sound banking practices.[128] The Monetary Board -- then
and now -- still prescribes, by regulation, the conditions and limitations under which banks may
grant extensions or renewals of their loans and other credit accommodations.[129]
Entries in Subsidiary Ledgers
Regular and Correct
Contrary to petitioners assertions, the subsidiary ledgers of respondent properly reflected all
entries pertaining to Petitioner NSBCIs loan accounts. In accordance with the Generally
Accepted Accounting Principles (GAAP) for the Banking Industry,[130] all interests accrued or
earned on such loans, except those that were restructured and non-accruing,[131] have been
periodically taken into income.[132] Without a doubt, the subsidiary ledgers in a manual
accounting system are mere private documents[133] that support and are controlled by the
general ledger.[134] Such ledgers are neither foolproof nor standard in format, but are
periodically subject to audit. Besides, we go by the presumption that the recording of private
transactions has been fair and regular, and that the ordinary course of business has been
followed.
Second Main Issue:
Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
142
Respondent aptly exercised its option to foreclose the mortgage,[135] after petitioners had
failed to pay all the Notes in full when they fell due.[136] The extrajudicial sale and subsequent
proceedings are therefore valid, but the alleged deficiency claim cannot be recovered.
Auction Price Adequate
subjected to 1 percent attorneys fees. The total outstanding obligation is compared to the bid
price. On the basis of these rates and the comparison made, the deficiency claim receivable
amounting to P2,172,476.43 in fact vanishes. Instead, there is an overpayment by more than P3
million, as shown in the following Schedules:

In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights
thereto are used as security[139] for the fulfillment of the principal loan obligation,[140] the bid
price may be lower than the propertys fair market value.[141] In fact, the loan value itself is only
70 percent of the appraised value.[142] As correctly emphasized by the appellate court, a low
bid price will make it
easier[143] for the owner to effect redemption[144] by subsequently reacquiring the property
or by selling the right to redeem and thus recover alleged losses. Besides, the public auction sale
has been regularly and fairly conducted,[145] there has been ample authority to effect the
sale,[146] and the Certificates of Title can be relied upon. No personal notice[147] is even
required,[148] because an extrajudicial foreclosure is an action in rem, requiring only notice by
publication and posting, in order to bind parties interested in the foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of registration of the
Certificate of Sale with the Registry of Deeds,[151] respondent -- being the highest bidder -- has
the right to a writ of possession, the final process that will consummate the extrajudicial
foreclosure. On the other hand, petitioner-spouses, who are mortgagors herein, shall lose all
their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in
the absence of a contrary stipulation,[153] the action for recovery of such amount -- being
clearly sureties to the principal obligation -- may still be directed against them.[154] However,
respondent may impose only the stipulated interest rates of 19.5 percent and 21.5 percent on
the respective availments -- subject to the 12 percent legal rate revision upon automatic
conversion into medium-term loans -- plus 1 percent attorneys fees, without additional charges
on penalty, insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are
reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan
conversion, these rates are further reduced to the legal rate of 12 percent. Payments made by
petitioners are pro-rated, the charges on penalty and insurance eliminated, and the resulting
total unpaid principal and interest of P6,582,077.70 as of the date of public auction is then

143
144
145
146
In the preparation of the above-mentioned schedules, these basic legal principles were
followed:
First, the payments were applied to debts that were already due.[155] Thus, when the
first payment was made and applied on January 5, 1990, all Promissory Notes were already due.
Second, payments of the principal were not made until the interests had been
covered.[156] For instance, the first payment on January 15, 1990 had initially been applied to
all interests due on the notes, before deductions were made from their respective principal
amounts. The resulting decrease in interest balances served as the bases for subsequent pro-
ratings.
Third, payments were proportionately applied to all interests that were due and of the
same nature and burden.[157] This legal principle was the rationale for the pro-rated
computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due and unpaid
were added to the principal; hence, such interests did not earn any additional interest.[158] The
simple -- not compounded -- method of interest calculation[159] was used on all Notes until the
date of public auction.
In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency
receivable in favor of PNB, but rather an excess claim or surplus[162] payable by respondent;
this excess should immediately be returned to petitioner-spouses or their assigns -- not to
mention the buildings and improvements[163] on and the fruits of the property -- to the end
that no one may be unjustly enriched or benefited at
the expense of another.[164] Such surplus is in the amount of P3,686,101.52, computed as
follows:
Total unpaid principal and interest on the
promissory notes as of February 26, 1992:
Drawdown on June 29, 1989
(Schedule 1) P 4,037,204.10
Drawdown on September 1, 1989
(Schedule 2) 2,289,040.38
Drawdown on September 6, 1989
(Schedule 3) 255,833.22
6,582,077.70
Add: 1% attorneys fees 65,820.78
Total outstanding obligation 6,647,898.48
Less: Bid price 10,334,000.00
Excess P 3,686,101.52
Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint
and Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They
consented to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not only for
the payment of all sums due and payable in favor of respondent, but also for the faithful and
prompt performance of all the terms and conditions thereof.[167] Additionally, the corporate
secretary of Petitioner NSBCI certified as early as February 23, 1989, that the spouses should act
as such surety.[168] But, their solidary liability should be carefully studied, not sweepingly
assumed to cover all availments instantly.
First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners,[169] it
covered only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms
of a contract of suretyship undeniably determine the suretys liability[170] and cannot extend
beyond what is stipulated therein.[171] Yet, the total amount petitioner-spouses agreed to be
held liable for was P7,700,000; by the time the JSA was executed, the first Promissory Note was
still unpaid and was thus brought within the JSAs ambit.[172]
Second, while the JSA included all costs, charges and expenses that respondent might incur or
sustain in connection with the credit documents,[173] only the interest was imposed under the
pertinent Credit Agreements. Moreover, the relevant Promissory Notes had to be resorted to
for proper valuation of the interests charged.
Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against
the party who may have caused any ambiguity therein, no such ambiguity was found. Petitioner-
spouses, who agreed to be accommodation mortgagors,[174] can no longer be held individually
liable for the entire onerous obligation[175] because, as
it turned out, it was respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5
percent and 21.5 percent stipulated in the Promissory Notes may be imposed by respondent on
the respective availments. After 730 days, the portions remaining unpaid are automatically
converted into medium-term loans at the legal rate of 12 percent. In all instances, the simple
method of interest computation is followed. Payments made by petitioners are applied and pro-
rated according to basic legal principles. Charges on penalty and insurance are eliminated, and
1 percent attorneys fees imposed upon the total unpaid balance of the principal and interest as
of the date of public auction. The P2 million deficiency claim therefore vanishes, and a refund
of P3,686,101.52 arises.
WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals is
AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum of P3,686,101.52
representing the overcollection computed above, plus interest thereon at the legal rate of six
percent (6%) per annum from the filing of the Complaint until the finality of this Decision. After
this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per
annum until its satisfaction. No costs. SO ORDERED.
147
 [G.R. NO. 171169 : August 24, 2009]
GC DALTON INDUSTRIES, INC., Petitioner, v. EQUITABLE PCI BANK, Respondent.
DECISION
CORONA, J.:
In 1999, respondent Equitable PCI Bank extended a P30-million credit line to Camden Industries,
Inc. (CII) allowing the latter to avail of several loans (covered by promissory notes) and to
purchase trust receipts. To facilitate collection, CII executed a "hold-out" agreement in favor of
respondent authorizing it to deduct from its savings account any amounts due. To guarantee
payment, petitioner GC Dalton Industries, Inc. executed a third-party mortgage of its real
properties in Quezon City1 and Malolos, Bulacan2 as security for CII's loans.3
CII did not pay its obligations despite respondent's demands. By 2003, its outstanding
consolidated promissory notes and unpaid trust receipts had reached a staggering
P68,149,132.40.4
Consequently, respondent filed a petition for extrajudicial foreclosure of petitioner's Bulacan
properties in the Regional Trial Court (RTC) of Bulacan on May 7, 2004.5 On August 3, 2004, the
mortgaged properties were sold at a public auction where respondent was declared the highest
bidder. Consequently, a certificate of sale6 was issued in respondent's favor on August 3, 2004.
On September 13, 2004, respondent filed the certificate of sale and an affidavit of consolidation
of ownership7 in the Register of Deeds of Bulacan pursuant to Section 47 of the General Banking
Law.8 Hence, petitioner's TCTs covering the Bulacan properties were cancelled and new ones
were issued in the name of respondent.9
In view of the foregoing, respondent filed an ex parte motion for the issuance of a writ of
possession10 in the RTC Bulacan, Branch 10 on January 10, 2005.11
Previously, however, on August 4, 2004, CII had filed an action for specific performance and
damages12 in the RTC of Pasig, Branch 71 (Pasig RTC), asserting that it had allegedly paid its
obligation in full to respondent.13 CII sought to compel respondent to render an accounting in
order to prove that the bank fraudulently foreclosed on petitioner's mortgaged properties.
Because respondent allegedly failed to appear during the trial, the Pasig RTC rendered a decision
on March 30, 200514 based on the evidence presented by CII. It found that, while CII's past due
obligation amounted only to P14,426,485.66 as of November 30, 2002, respondent had
deducted a total of P108,563,388.06 from CII's savings account. Thus, the Pasig RTC ordered
respondent: (1) to return to CII the "overpayment" with legal interest of 12% per annum
amounting to P94,136,902.40; (2) to compensate it for lost profits amounting to P2,000,000 per
month starting August 2004 with legal interest of 12% per annum until full payment and (3) to
return the TCTs covering the mortgaged properties to petitioner. It likewise awarded CII
P2,000,000 and P300,000, respectively, as moral and exemplary damages and P500,000 as
attorney's fees.
Respondent filed a notice of appeal. CII, on the other hand, moved for the immediate entry and
execution of the abovementioned decision.
In an order dated December 7, 2005,15 the Pasig RTC dismissed respondent's notice of appeal
due to its failure to pay the appellate docket fees. It likewise found respondent guilty of forum-
shopping for filing the petition for the issuance of a writ of possession in the Bulacan RTC. Thus,
the Pasig RTC ordered the immediate entry of its March 30, 2005 decision.16
Meanwhile, in view of the pending case in the Pasig RTC, petitioner opposed respondent's ex
parte motion for the issuance of a writ of possession in the Bulacan RTC. It claimed that
respondent was guilty of fraud and forum-shopping, and that it was not informed of the
foreclosure. Furthermore, respondent fraudulently foreclosed on the properties since the Pasig
RTC had not yet determined whether CII indeed failed to pay its obligations.
In an order dated December 10, 2005, the Bulacan RTC granted the motion and a writ of
possession was issued in respondent's favor on December 19, 2005.
Petitioner immediately assailed the December 10, 2005 order of the Bulacan RTC via a petition
for certiorari in the Court of Appeals (CA). It claimed that the order violated Section 14, Article
VIII of the Constitution17 which requires that every decision must clearly and distinctly state its
factual and legal bases. In a resolution dated January 13, 2006,18 the CA dismissed the petition
for lack of merit on the ground that an order involving the issuance of a writ of possession is not
a judgment on the merits, hence, not covered by the requirement of Section 14, Article VIII of
the Constitution.
Petitioner elevated the matter to this Court, assailing the January 13, 2006 resolution of the CA.
It insists that the December 10, 2005 order of the Bulacan RTC was void as it was bereft of factual
and legal bases.rbl rl l lbrr
Petitioner likewise cites the conflict between the December 10, 2005 order of the Bulacan RTC
and the December 7, 2005 order of the Pasig RTC. Petitioner claims that, since the Pasig RTC
already ordered the entry of its March 30, 2005 decision (in turn ordering respondent to return
148
TCT No. 351231 and all such other owner's documents of title as may have been placed in its
possession by virtue of the subject trust receipt and loan transactions), the same was already
final and executory. Thus, inasmuch as CII had supposedly paid respondent in full, it was
erroneous for the Bulacan RTC to order the issuance of a writ of possession to respondent.
Respondent, on the other hand, asserts that petitioner is raising a question of fact as it
essentially assails the propriety of the issuance of the writ of possession. It likewise points out
that petitioner did not truthfully disclose the status of the March 30, 2005 decision of the Pasig
RTC because, in an order dated April 4, 2006, the Pasig RTC partially reconsidered its December
7, 2005 order and gave due course to respondent's notice of appeal. (The propriety of the said
April 4, 2006 order is still pending review in the CA.)
We deny the petition.
remedy had already lapsed, petitioner could no longer assail the validity of the August 3, 2004
sale.
Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground
for the refusal to issue a writ of possession. Regardless of whether or not there is a pending suit
for the annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ
of possession, without prejudice, of course, to the eventual outcome of the pending annulment
case.28
Needless to say, petitioner committed a misstep by completely relying and pinning all its hopes
for relief on its complaint for specific performance and damages in the Pasig RTC,29 instead of
resorting to the remedy of annulment (of the auction sale and writ of possession) under Section
8 of Act 3135 in the Bulacan RTC.

The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is summary WHEREFORE, the petition is hereby DENIED.
and ministerial in nature as such proceeding is merely an incident in the transfer of title.19 The
trial court does not exercise discretion in the issuance thereof.20 For this reason, an order for Costs against petitioner.
the issuance of a writ of possession is not the judgment on the merits contemplated by Section
14, Article VIII of the Constitution. Hence, the CA correctly upheld the December 10, 2005 order SO ORDERED.
of the Bulacan RTC.

Furthermore, the mortgagor loses all legal interest over the foreclosed property after the
expiration of the redemption period.21 Under Section 47 of the General Banking Law,22 if the
mortgagor is a juridical person, it can exercise the right to redeem the foreclosed property until,
but not after, the registration of the certificate of foreclosure sale within three months after
foreclosure, whichever is earlier. Thereafter, such mortgagor loses its right of redemption.

Respondent filed the certificate of sale and affidavit of consolidation with the Register of Deeds
of Bulacan on September 13, 2004. This terminated the redemption period granted by Section
47 of the General Banking Law. Because consolidation of title becomes a right upon the
expiration of the redemption period,23 respondent became the owner of the foreclosed
properties.24 Therefore, when petitioner opposed the ex parte motion for the issuance of the
writ of possession on January 10, 2005 in the Bulacan RTC, it no longer had any legal interest in
the Bulacan properties.

Nevertheless, even if the ownership of the Bulacan properties had already been consolidated in
the name of respondent, petitioner still had, and could have availed of, the remedy provided in
Section 8 of Act 3135.25 It could have filed a petition to annul the August 3, 2004 auction sale
and to cancel the December 19, 2005 writ of possession,26 within 30 days after respondent was
given possession.27 But it did not. Thus, inasmuch as the 30-day period to avail of the said

149
 G.R. No. 195540 March 13, 2013
GOLDENWAY MERCHANDISING CORPORATION, Petitioner,
vs.
EQUITABLE PCI BANK, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari which seeks to reverse and set aside the
Decision1 dated November 19, 2010 and Resolution2 dated January 31, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 91120. The CA affirmed the Decision3 dated January 8, 2007 of
the Regional Trial Court (RTC) of- Valenzuela City, Branch 171 dismissing the complaint in Civil
Case No. 295-V -01.
The facts are undisputed.
On November 29, 1985, Goldenway Merchandising Corporation (petitioner) executed a Real
Estate Mortgage in favor of Equitable PCI Bank (respondent) over its real properties situated in
Valenzuela, Bulacan (now Valenzuela City) and covered by Transfer Certificate of Title (TCT) Nos.
T-152630, T-151655 and T-214528 of the Registry of Deeds for the Province of Bulacan. The
mortgage secured the Two Million Pesos (2,000,000.00) loan granted by respondent to
petitioner and was duly registered.4
As petitioner failed to settle its loan obligation, respondent extrajudicially foreclosed the
mortgage on December 13, 2000. During the public auction, the mortgaged properties were sold
for 3,500,000.00 to respondent. Accordingly, a Certificate of Sale was issued to respondent on
January 26, 2001. On February 16, 2001, the Certificate of Sale was registered and inscribed on
TCT Nos. T-152630, T-151655 and T-214528.5
In a letter dated March 8, 2001, petitioners counsel offered to redeem the foreclosed properties
by tendering a check in the amount of 3,500,000.00. On March 12, 2001, petitioners counsel
met with respondents counsel reiterating petitioners intention to exercise the right of
redemption.6 However, petitioner was told that such redemption is no longer possible because
the certificate of sale had already been registered. Petitioner also verified with the Registry of
Deeds that title to the foreclosed properties had already been consolidated in favor of
respondent and that new certificates of title were issued in the name of respondent on March
9, 2001.
On December 7, 2001, petitioner filed a complaint7 for specific performance and damages
against the respondent, asserting that it is the one-year period of redemption under Act No.
3135 which should apply and not the shorter redemption period provided in Republic Act (R.A.)
No. 8791. Petitioner argued that applying Section 47 of R.A. 8791 to the real estate mortgage
executed in 1985 would result in the impairment of obligation of contracts and violation of the
equal protection clause under the Constitution. Additionally, petitioner faulted the respondent
for allegedly failing to furnish it and the Office of the Clerk of Court, RTC of Valenzuela City with
a Statement of Account as directed in the Certificate of Sale, due to which petitioner was not
apprised of the assessment and fees incurred by respondent, thus depriving petitioner of the
opportunity to exercise its right of redemption prior to the registration of the certificate of sale.
In its Answer with Counterclaim,8 respondent pointed out that petitioner cannot claim that it
was unaware of the redemption price which is clearly provided in Section 47 of R.A. No. 8791,
and that petitioner had all the opportune time to redeem the foreclosed properties from the
time it received the letter of demand and the notice of sale before the registration of the
certificate of sale. As to the check payment tendered by petitioner, respondent said that even
assuming arguendo such redemption was timely made, it was not for the amount as required
by law.
On January 8, 2007, the trial court rendered its decision dismissing the complaint as well as the
counterclaim. It noted that the issue of constitutionality of Sec. 47 of R.A. No. 8791 was never
raised by the petitioner during the pre-trial and the trial. Aside from the fact that petitioners
attempt to redeem was already late, there was no valid redemption made because Atty. Judy
Ann Abat-Vera who talked to Atty. Joseph E. Mabilog of the Legal Division of respondent bank,
was not properly authorized by petitioners Board of Directors to transact for and in its behalf;
it was only a certain Chan Guan Pue, the alleged President of petitioner corporation, who gave
instruction to Atty. Abat-Vera to redeem the foreclosed properties.9
Aggrieved, petitioner appealed to the CA which affirmed the trial courts decision. According to
the CA, petitioner failed to justify why Section 47 of R.A. No. 8791 should be declared
unconstitutional. Furthermore, the appellate court concluded that a reading of Section 47
plainly reveals the intention to shorten the period of redemption for juridical persons and that
the foreclosure of the mortgaged properties in this case when R.A. No. 8791 was already in
effect clearly falls within the purview of the said provision.10
Petitioners motion for reconsideration was likewise denied by the CA.
In the present petition, it is contended that Section 47 of R.A. No. 8791 is inapplicable
considering that the contracting parties expressly and categorically agreed that the foreclosure
of the real estate mortgage shall be in accordance with Act No. 3135. Citing Co v. Philippine
150
National Bank11 petitioner contended that the right of redemption is part and parcel of the
Deed of Real Estate Mortgage itself and attaches thereto upon its execution, a vested right
flowing out of and made dependent upon the law governing the contract of mortgage and not
on the mortgagees act of extrajudicially foreclosing the mortgaged properties. This Court thus
held in said case that "Under the terms of the mortgage contract, the terms and conditions
under which redemption may be exercised are deemed part and parcel thereof whether the
same be merely conventional or imposed by law."
Petitioner then argues that applying Section 47 of R.A. No. 8791 to the present case would be a
substantial impairment of its vested right of redemption under the real estate mortgage
contract. Such impairment would be violative of the constitutional proscription against
impairment of obligations of contract, a patent derogation of petitioners vested right and
clearly changes the intention of the contracting parties. Moreover, citing this Courts ruling in
Rural Bank of Davao City, Inc. v. Court of Appeals12 where it was held that "Section 119 prevails
over statutes which provide for a shorter period of redemption in extrajudicial foreclosure
sales", and in Sulit
v. Court of Appeals,13 petitioner stresses that it has always been the policy of this Court to aid
rather than defeat the mortgagors right to redeem his property.
Petitioner further argues that since R.A. No. 8791 does not provide for its retroactive
application, courts therefore cannot retroactively apply its provisions to contracts executed and
consummated before its effectivity. Also, since R.A. 8791 is a general law pertaining to the
banking industry while Act No. 3135 is a special law specifically governing real estate mortgage
and foreclosure, under the rules of statutory construction that in case of conflict a special law
prevails over a general law regardless of the dates of enactment of both laws, Act No. 3135
clearly should prevail on the redemption period to be applied in this case.
The constitutional issue having been squarely raised in the pleadings filed in the trial and
appellate courts, we shall proceed to resolve the same.
The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135,14 as amended
by Act No. 4118. Section 6 thereof provides:
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor
of said debtor, or any person having a lien on the property subsequent to the mortgage or deed
of
trust under which the property is sold, may redeem the same at any time within the term of one
year from and after the date of the sale; and such redemption shall be governed by the
provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the
Code of
Civil Procedure,15 in so far as these are not inconsistent with the provisions of this Act.
The one-year period of redemption is counted from the date of the registration of the certificate
of sale. In this case, the parties provided in their real estate mortgage contract that upon
petitioners default and the latters entire loan obligation becoming due, respondent may
immediately foreclose the mortgage judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended.
However, Section 47 of R.A. No. 8791 otherwise known as "The General Banking Law of 2000"
which took effect on June 13, 2000, amended Act No. 3135. Said provision reads:
SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether
judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other
credit accommodation granted, the mortgagor or debtor whose real property has been sold for
the full or partial payment of his obligation shall have the right within one year after the sale of
the real estate, to redeem the property by paying the amount due under the mortgage deed,
with interest thereon at the rate specified in the mortgage, and all the costs and expenses
incurred by the bank or institution from the sale and custody of said property less the income
derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial
or extrajudicial foreclosure shall have the right to enter upon and take possession of such
property immediately after the date of the confirmation of the auction sale and administer the
same in accordance with law. Any petition in court to enjoin or restrain the conduct of
foreclosure proceedings instituted pursuant to this provision shall be given due course only
upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he
will pay all the damages which the bank may suffer by the enjoining or the restraint of the
foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration.
(Emphasis supplied.)
151
Under the new law, an exception is thus made in the case of juridical persons which are allowed
to exercise the right of redemption only "until, but not after, the registration of the certificate
of foreclosure sale" and in no case more than three (3) months after foreclosure, whichever
comes first.16
May the foregoing amendment be validly applied in this case when the real estate mortgage
contract was executed in 1985 and the mortgage foreclosed when R.A. No. 8791 was already in
effect?
We answer in the affirmative.
When confronted with a constitutional question, it is elementary that every court must
approach it with grave care and considerable caution bearing in mind that every statute is
presumed valid and every reasonable doubt should be resolved in favor of its
constitutionality.17 For a law to be nullified, it must be shown that there is a clear and
unequivocal breach of the Constitution. The ground for nullity must be clear and beyond
reasonable doubt.18 Indeed, those who petition this Court to declare a law, or parts thereof,
unconstitutional must clearly establish the basis therefor. Otherwise, the petition must fail.19
Petitioners contention that Section 47 of R.A. 8791 violates the constitutional proscription
against impairment of the obligation of contract has no basis.
The purpose of the non-impairment clause of the Constitution20 is to safeguard the integrity of
contracts against unwarranted interference by the State. As a rule, contracts should not be
tampered with by subsequent laws that would change or modify the rights and obligations of
the parties.21 Impairment is anything that diminishes the efficacy of the contract. There is an
impairment if a subsequent law changes the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement
of the rights of the parties.22
Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but
only modified the time for the exercise of such right by reducing the one-year period originally
provided in Act No. 3135. The new redemption period commences from the date of foreclosure
sale, and expires upon registration of the certificate of sale or three months after foreclosure,
whichever is earlier. There is likewise no retroactive application of the new redemption period
because Section 47 exempts from its operation those properties foreclosed prior to its effectivity
and whose owners shall retain their redemption rights under Act No. 3135.
Petitioners claim that Section 47 infringes the equal protection clause as it discriminates
mortgagors/property owners who are juridical persons is equally bereft of merit.
The equal protection clause is directed principally against undue favor and individual or class
privilege.1wphi1 It is not intended to prohibit legislation which is limited to the object to which
it is directed or by the territory in which it is to operate. It does not require absolute equality,
but merely that all persons be treated alike under like conditions both as to privileges conferred
and liabilities imposed.23 Equal protection permits of reasonable classification.24 We have
ruled that one class may be treated differently from another where the groupings are based on
reasonable and real distinctions.25 If classification is germane to the purpose of the law,
concerns all members of the class, and applies equally to present and future conditions, the
classification does not violate the equal protection guarantee.26
We agree with the CA that the legislature clearly intended to shorten the period of redemption
for juridical persons whose properties were foreclosed and sold in accordance with the
provisions of Act No. 3135.27
The difference in the treatment of juridical persons and natural persons was based on the nature
of the properties foreclosed whether these are used as residence, for which the more liberal
one-year redemption period is retained, or used for industrial or commercial purposes, in which
case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership
of property and enable mortgagee-banks to dispose sooner of these acquired assets. It must be
underscored that the General Banking Law of 2000, crafted in the aftermath of the 1997
Southeast Asian financial crisis, sought to reform the General Banking Act of 1949 by fashioning
a legal framework for maintaining a safe and sound banking system.28 In this context, the
amendment introduced by Section 47 embodied one of such safe and sound practices aimed at
ensuring the solvency and liquidity of our banks.1wphi1 It cannot therefore be disputed that
the said provision amending the redemption period in Act 3135 was based on a reasonable
classification and germane to the purpose of the law.
This legitimate public interest pursued by the legislature further enfeebles petitioners
impairment of contract theory.
The right of redemption being statutory, it must be exercised in the manner prescribed by the
statute,29 and within the prescribed time limit, to make it effective. Furthermore, as with other
individual rights to contract and to property, it has to give way to police power exercised for
public welfare.30 The concept of police power is well-established in this jurisdiction. It has been
defined as the "state authority to enact legislation that may interfere with personal liberty or
property in order to promote the general welfare." Its scope, ever-expanding to meet the
exigencies of the times, even to anticipate the future where it could be done, provides enough
room for an efficient and flexible response to conditions and circumstances thus assuming the
greatest benefits.31
152

The freedom to contract is not absolute; all contracts and all rights are subject to the police
power of the State and not only may regulations which affect them be established by the State,
but all such regulations must be subject to change from time to time, as the general well-being
of the community may require, or as the circumstances may change, or as experience may
demonstrate the necessity.32 Settled is the rule that the non-impairment clause of the
Constitution must yield to the loftier purposes targeted by the Government. The right granted
by this provision must submit to the demands and necessities of the States power of
regulation.33 Such authority to regulate businesses extends to the banking industry which, as
this Court has time and again emphasized, is undeniably imbued with public interest.34
Having ruled that the assailed Section 47 of R.A. No. 8791 is constitutional, we find no reversible
error committed by the CA in holding that petitioner can no longer exercise the right of
redemption over its foreclosed properties after the certificate of sale in favor of respondent had
been registered.
WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. The Decision dated
November 19, 2010 and Resolution dated January 31, 2011 of the Court of Appeals in CA-G.R.
CV No. 91120 are hereby AFFIRMED.
With costs against the petitioner.
SO ORDERED.
G.R. No. 134068 June 25, 2001
UNION BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, APOLONIA DE JESUS GREGORIO, GONZALO VINCOY, married to
TRINIDAD GREGORIO VINCOY, respondents.
DE LEON, JR., J.:
This is a motion for reconsideration of the resolution of this Court dated July 12, 1999 dismissing
the petition for review on certiorari filed by petitioner Union Bank of the Philippines which
assailed the decision of the Court of Appeals (a) upholding the validity of the real estate
mortgage executed by respondents Gonzalo and Trinidad Vincoy in favor of petitioner as
security for a loan in the principal amount of Two Million Pesos (P2,000,000,00.), and (b) fixing
the redemption price of the property mortgaged at Three Million Two Hundred Ninety Thousand
Pesos (P3,290,000.00) representing the purchase price of the said property at the foreclosure
sale plus one percent (1%) monthly interest from April 19, 1991, the date of the foreclosure sale,
until its redemption pursuant to Section 30, Rule 39 of the Rules of Court.
The following are the factual antecedents.
On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their residence
in favor of petitioner to secure the payment of a loan to Delco Industries (Phils.), Incorporated1
in the amount of Two Million Pesos (P2,000,000.00). For failure of the respondents to pay the
loan at its date of maturity, petitioner extrajudicially foreclosed the mortgage and scheduled
the foreclosure sale on April 10, 1991.
The petitioner submitted the highest bid for Three Million Two Hundred Ninety Thousand Pesos
(P3,290,000.OO) at the foreclosure sale. Accordingly, a certificate of sale was issued to
petitioner and duly annotated at the back of the Transfer Certificate of Title covering the
property on May 8,1991.2
Prior to the expiration of the redemption period on May 8,1992, the respondents filed a
complaint for annulment of mortgage with the lower court. In their complaint, respondents
alleged that the subject property mortgaged to petitioner had in fact been constituted as a
family home as early as October 27, 1989. Among the beneficiaries of the said family home are
the sisters of respondent Trinidad Vincoy, namely Apolonia and Luciana De Jesus Gregorio
whose consent to the mortgage was not obtained.3 Respondents thus assailed the validity of
the mortgage on the ground that Article 158 of the Family Code4 prohibits the execution, forced
sale, attachment or any other encumbrance of a family home without the written consent of
153
majority of the beneficiaries thereof of legal age.5 On the other hand, petitioner maintained
that the mortgaged property of the respondents could not be legally constituted as a family
home because its actual value exceeded Three Hundred Thousand Pesos (P300,000.00), the
maximum value for a family home in urban areas as stipulated in Article 157 of the Family Code.6
The lower court rendered judgment declaring the constitution of the family home void and the
mortgage executed in favor of the petitioner valid. It held, among others, that Article 158 of the
Family Code was not applicable to respondents' family home as the value of the latter at the
time of its alleged constitution exceeded Three Hundred Thousand Pesos (P300,000.00).7 It also
respondent Gonzalo Vincoy and/or Delco Industries (Phils.), Inc. to pay petitioner his and/or its
outstanding obligation as of February 15,1993 in the amount of Four Million Eight Hundred
Sixteen Thousand One Hundred Ninety-Four Pesos and Forty Four Centavos (p4,816,194.44)
including such sums that may accrue by way of interests and penalties.8
Aggrieved, respondents appealed to the Court of Appeals contending that the lower court erred
in finding that their family home was not duly constituted, and that the mortgage in favor of
petitioner is valid. Respondents also claimed that the correct amount sufficient for the
redemption of their property as of February 15,1993 is Two Million Seven Hundred Seventy
Three Thousand Seven Hundred Twelve Pesos and Eighty Seven Centavos (P2,773,712.87)9 and
not Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-
Four Centavos (P4,816,194.44) as found by the lower court.
In a decision promulgated on June 4, 1997, the Court of Appeals sustained the finding of the
lower court that the alleged family home of the respondents did not fall within the purview of
Article 157 of the Family Code as its value at the time of its constitution was more than the
maximum value of Three Hundred Thousand Pesos (P300,000.00). Hence, the Court of Appeals
upheld the validity of the mortgage executed over the said property in favor of the petitioner.10
However, it found that the amount sufficient for the redemption of the foreclosed property is
Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) equivalent to the purchase
price at tile foreclosure sale plus one percent (1%) monthly interest from April 19, 1991 up to
the date of redemption11 pursuant to Section 30, Rule 39 of the Rules of Court.12
Dissatisfied with the ruling of the Court of Appeals, the petitioner filed a petition for review on
certiorari with Court submitting the following resolution:
I. The Court of Appeals resolves an issue of redemption which was not even directly raised by
the parties and contrary to the evidence on record.
2. Assuming without admitting that respondents are entitled to redemption, the price set by the
Court of Appeals is not based on laws.13
Petitioner contends, first of all, that in allowing the respondents to redeem the subject
foreclosed property, the Court of Appeals completely ignored that fact that neither respondents'
complaint before the lower court nor their brief filed before the Court of Appeals prayed for the
redemption of the said property. On the contrary, respondents had consistently insisted on the
nullity of the mortgage. Thus, to allow them to redeem the property would contradict that very
theory of their case.14
Petitioner also contends that the respondents had already lost their right to redeem the
foreclosed property when they failed to exercise their right of redemption by paying the
redemption price within the period provided by law.15 In the event, however, that the Courts
upholds the right of the respondents to redeem the said property, the petitioner claims that it
is not Section 30, Rule 39 of the Rules of the Court that applies in determining the amount
sufficient for redemption but Section 78 of the General Banking Act as amended by the
Presidential Decree No. 182816 which provides:
"xxx. In the event of foreclosure, whether judicially or extra judicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or under the
provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the right, within one year
after the sale of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property by paying the amount fixed by the court in the order of execution, or the
amount due under the mortgage deed, as the case may be, with interest thereon at the rate
specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank
or institution concerned by reason of the execution and sale and as a result of the custody of
the said property less the income received from the property." [Italics supplied].
This Court dismissed the petition in a Resolution promulgated on July 12,1999 on the ground
that the Court of Appeals did not commit any reversible error and that the petition raises mere
questions of fact already amply passed upon by the appellate court.17 Hence, the instant motion
for reconsideration.
We are persuaded to reconsider.
First of all, it is important to note that this case was decided by the lower court on the basis only
the pleadings submitted by the parties. No trial was conducted, thus, no evidence other than
submitted with the pleadings could be considered.
154
A careful scrutiny of the pleadings filed by the respondents before the lower court reveals that
at no time did the respondents pray that they be allowed to redeem the subject foreclosed
property.18 On the other hand, respondents never wavered from the belief that the mortgage
over the said property is, in the first place, void for having been executed over a duly constituted
family home without the consent of the beneficiaries thereof. After upholding the validity of
mortgage, the lower court ordered respondent Gonzalo Vincoy and/or Delco Industries, Inc. to
pay petitioner the amount of Four Million Eight Hundred Sixteen Thousand One Hundred
Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) plus interest and penalties
representing Vincoy's and/or Delco's outstanding obligation to petitioner as of February
15,1993.19 There is no mention whatsoever of respondents right to redeem the property.
Respondents raised the issue of redemption for the first time only on appeal in contesting the
amount ordered by the lower court to be paid by respondents to the petitioner. Thus, the
actuation of the Court of Appeals in allowing the respondents to redeem the subject foreclosed
property is not legally permissible. In petitions for review or appeal under Rule 45 of the Rules
of Court, the appellate tribunal is limited to the determination of whether tile lower court
committed reversible error.20
It is settled jurisprudence that an issue which was neither averred in the complain nor raised
during the trial in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process.21 On this ground alone, the
Court of Appeals should have completely ignored the issue of respondents' right to redeem the
subject foreclosed property. In addition, a reason just as glaringly obvious exists for declaring
the respondents' right of redemption already non-existent one year after May 8,1991, the date
of the registration of the sale at public auction.
Pursuant to Section 78 of the General Banking Act, a mortgagor whose real property has been
sold at a public auction, judicially or extrajudicially, for the full or partial payment of an
obligation to any bank, shall have the right, within one year after the sale of the real estate to
redeem the property. The one-year period is actually to be reckoned from the date of
registration of the sale.22 Clearly therefore, respondents had only until May 8, 1992 to redeem
the subject foreclosed property. Their failure to exercise the right of redemption by paying the
redemption price within the period prescribed by the law effectively divested them of said right.
It bears reiterating that during the one year redemption period, respondents never attempted
to redeem the subject property but instead persisted in their theory that the mortgage is null
and void. To allow them now to redeem the same property would, as petitioner aptly puts it, be
letting them have their cake and eat it too.
It cannot also be argued that the action for annulment of the mortgage filed by the respondents
tolled the running of the one year period of redemption. In the case of Sumerariz v.
Development Bank of the Philippines,23 petitioners therein contented that the one-year period
to redeem the property foreclosed by respondent was suspended by the institution of an action
to annul the foreclosure sale filed three (3) days before the expiration of the period. To this we
ruled that:
"We have not found, however, any statute or decision in support of this pretense. Moreover. up
to now plaintiffs have not exercised the right of redemption. Indeed. although they have
intimated their wish to redeem the property in question, they have not deposited the amount
necessary therefor. It may be not a miss to note that, unlike Section 30 of Rule 39 of the Rules
of Court, which permits the extension of the period of redemption of mortgaged properties.
Section 3 of Commonwealth Act No. 459, in relation to Section 9 of Republic Act No. 85, which
governs the redemption of property of mortgaged to the Bank does no contain a similar
provision. Again this question has been definitely settled by the previous case declaring the
plaintiffs' right of redemption has already been extinguished in view of their failure to exercise
it within the statutory period."24
Also, in the more recent case of, Vaca v. Court of Appeals,25 we declared that the pendency of
an action questioning the validity of a mortgage cannot bar the issuance of the writ of possession
after title to the property has been consolidated in the mortgagee.26 The implication is clear:
the period of redemption is not interrupted by the filling of an action assailing the validity of the
mortgage, so that at the expiration thereof, the mortgagee who acquires the property at the
foreclosure sale can proceed to have the title consolidated in his name and a writ of possession
issued in his favor.
To rule otherwise, and allow the institution of an action questioning the validity of a mortgage
to suspend the running of the one year period of redemption would constitute a dangerous
precedent. A likely off shoot of such a ruling is\ the institution of frivolous suits for annulment
of mortgage intended merely to give the mortgagor more time to redeem the mortgaged
property.1wphi1.nt
As a final word, although the issue pertaining to the correct amount for the redemption of the
subject foreclosed property has been rendered moot by the foregoing, a point of clarification
should perhaps be made as to applicable legal provision. Petitioner's contention that Section 78
of the General Banking Act governs the determination of the redemption price of the subject
property is meritorious. In Ponce de Leon v. Rehabilitation Finance Corporation,27 this Court
had occasion to rule that Section 78 of the General Banking Act had the effect of amending
Section 6 of Act 313528 insofar as the redemption price is concerned when the mortgagee bank,
as in this case, or a banking or credit institution.29 The apparent conflict between the provisions
of Act No. 3135 and the General Banking Act was, therefore, resolved in favor of the latter, being
a special and subsequent legislation. This pronouncement was reiterated in the case of.Sy
155
v..Court of Appeals30 where we held that the amount at which the foreclosed property is G.R. No. 178429 October 23, 2009
redeemable is the amount due under the mortgage deed, or the outstanding obligation of the
mortgagor plus interest and expense in accordance with Section 78 of the General Banking JOSE C. GO, Petitioner,
Act.31 It was therefore manifest error on the part of the Court of Appeals to apply in the case vs.
at bar the provisions of Section 30 Rule 39 of the Rules of Court in fixing the redemption price BANGKO SENTRAL NG PILIPINAS, Respondent.
of the subject foreclosed property.
DECISION
WHEREFORE, the motion for reconsideration is hereby GRANTED. This Court's Resolution dated
July 12, 1999 is MODIFlED insofar as respondents are found to have lost their right to redeem BRION, J.:
the subject foreclosed property.
Through the present petition for review on certiorari,1 petitioner Jose C. Go (Go) assails the
SO ORDERED. October 26, 2006 decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 79149, as well as its
June 4, 2007 resolution.3 The CA decision and resolution annulled and set aside the May 20,
20034 and June 30, 20035 orders of the Regional Trial Court (RTC), Branch 26, Manila which
granted Gos motion to quash the Information filed against him.

THE FACTS

On August 20, 1999, an Information6 for violation of Section 83 of Republic Act No. 337 (RA 337)
or the General Banking Act, as amended by Presidential Decree No. 1795, was filed against Go
before the RTC. The charge reads:

That on or about and during the period comprised between June 27, 1996 and September 15,
1997, inclusive, in the City of Manila, Philippines, the said accused, being then the Director and
the President and Chief Executive Officer of the Orient Commercial Banking Corporation (Orient
Bank), a commercial banking institution created, organized and existing under Philippines laws,
with its main branch located at C.M. Recto Avenue, this City, and taking advantage of his position
as such officer/director of the said bank, did then and there wilfully, unlawfully and knowingly
borrow, either directly or indirectly, for himself or as the representative of his other related
companies, the deposits or funds of the said banking institution and/or become a guarantor,
indorser or obligor for loans from the said bank to others, by then and there using said borrowed
deposits/funds of the said bank in facilitating and granting and/or caused the facilitating and
granting of credit lines/loans and, among others, to the New Zealand Accounts loans in the total
amount of TWO BILLION AND SEVEN HUNDRED FIFTY-FOUR MILLION NINE HUNDRED FIVE
THOUSAND AND EIGHT HUNDRED FIFTY-SEVEN AND 0/100 PESOS, Philippine Currency, said
accused knowing fully well that the same has been done by him without the written approval of
the majority of the Board of Directors of said Orient Bank and which approval the said accused
deliberately failed to obtain and enter the same upon the records of said banking institution and
to transmit a copy of which to the supervising department of the said bank, as required by the
General Banking Act.

156

CONTRARY TO LAW. [Emphasis supplied.]
On May 28, 2001, Go pleaded not guilty to the offense charged.
After the arraignment, both the prosecution and accused Go took part in the pre-trial
conference where the marking of the voluminous evidence for the parties was accomplished.
After the completion of the marking, the trial court ordered the parties to proceed to trial on
the merits.
Before the trial could commence, however, Go filed on February 26, 20037 a motion to quash
the Information, which motion Go amended on March 1, 2003.8 Go claimed that the
Information was defective, as the facts charged therein do not constitute an offense under
Section 83 of RA 337 which states:
No director or officer of any banking institution shall either directly or indirectly, for himself or
as the representative or agent of another, borrow any of the deposits of funds of such banks,
nor shall he become a guarantor, indorser, or surety for loans from such bank, to others, or in
any manner be an obligor for money borrowed from the bank or loaned by it, except with the
written approval of the majority of the directors of the bank, excluding the director concerned.
Any such approval shall be entered upon the records of the corporation and a copy of such entry
shall be transmitted forthwith to the appropriate supervising department. The office of any
director or officer of a bank who violates the provisions of this section shall immediately become
vacant and the director or officer shall be punished by imprisonment of not less than one year
nor more than ten years and by a fine of not less than one thousand nor more than ten thousand
pesos.
The Monetary Board may regulate the amount of credit accommodations that may be extended,
directly or indirectly, by banking institutions to their directors, officers, or stockholders.
However, the outstanding credit accommodations which a bank may extend to each of its
stockholders owning two percent (2%) or more of the subscribed capital stock, its directors, or
its officers, shall be limited to an amount equivalent to the respective outstanding deposits and
book value of the paid-in capital contribution in the bank. Provided, however, that loans and
advances to officers in the form of fringe benefits granted in accordance with rules and
regulations as may be prescribed by Monetary Board shall not be subject to the preceding
limitation. (As amended by PD 1795)
In addition to the conditions established in the preceding paragraph, no director or a building
and loan association shall engage in any of the operations mentioned in said paragraphs, except
upon the pledge of shares of the association having a total withdrawal value greater than the
amount borrowed. (As amended by PD 1795)
In support of his motion to quash, Go averred that based on the facts alleged in the Information,
he was being prosecuted for borrowing the deposits or funds of the Orient Bank and/or acting
as a guarantor, indorser or obligor for the banks loans to other persons. The use of the word
"and/or" meant that he was charged for being either a borrower or a guarantor, or for being
both a borrower and guarantor. Go claimed that the charge was not only vague, but also did not
constitute an offense. He posited that Section 83 of RA 337 penalized only directors and officers
of banking institutions who acted either as borrower or as guarantor, but not as both.
Go further pointed out that the Information failed to state that his alleged act of borrowing
and/or guarantying was not among the exceptions provided for in the law. According to Go, the
second paragraph of Section 83 allowed banks to extend credit accommodations to their
directors, officers, and stockholders, provided it is "limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital contribution in the bank."
Extending credit accommodations to bank directors, officers, and stockholders is not per se
prohibited, unless the amount exceeds the legal limit. Since the Information failed to state that
the amount he purportedly borrowed and/or guarantied was beyond the limit set by law, Go
insisted that the acts so charged did not constitute an offense.
Finding Gos contentions persuasive, the RTC granted Gos motion to quash the Information on
May 20, 2003. It denied on June 30, 2003 the motion for reconsideration filed by the
prosecution.
The prosecution did not accept the RTC ruling and filed a petition for certiorari to question it
before the CA. The Information, the prosecution claimed, was sufficient. The word "and/or" did
not materially affect the validity of the Information, as it merely stated a mode of committing
the crime penalized under Section 83 of RA 337. Moreover, the prosecution asserted that the
second paragraph of Section 83 (referring to the credit accommodation limit) cannot be
interpreted as an exception to what the first paragraph provided. The second paragraph only
sets borrowing limits that, if violated, render the bank, not the director-borrower, liable. A
violation of the second paragraph of Section 83 under which Go is being prosecuted is
therefore separate and distinct from a violation of the first paragraph. Thus, the prosecution
prayed that the orders of the RTC quashing the Information be set aside and the criminal case
against Go be reinstated.
On October 26, 2006, the CA rendered the assailed decision granting the prosecutions petition
for certiorari.9 The CA declared that the RTC misread the law when it decided to quash the
Information against Go. It explained that the allegation that Go acted either as a borrower or a
157
guarantor or as both borrower and guarantor merely set forth the different modes by which the
offense was committed. It did not necessarily mean that Go acted both as borrower and
guarantor for the same loan at the same time. It agreed with the prosecutions stand that the
second paragraph of Section 83 of RA 337 is not an exception to the first paragraph. Thus, the
failure of the Information to state that the amount of the loan Go borrowed or guaranteed
exceeded the legal limits was, to the CA, an irrelevant issue. For these reasons, the CA annulled
and set aside the RTCs orders and ordered the reinstatement of the criminal charge against Go.
After the CAs denial of his motion for reconsideration,10 Go filed the present appeal by
certiorari.
THE PETITION
In his petition, Go alleges that the appellate court legally erred in overturning the trial courts
orders. He insists that the Information failed to allege the acts or omissions complained of with
sufficient particularity to enable him to know the offense being charged; to allow him to
properly prepare his defense; and likewise to allow the court to render proper judgment.
Repeating his arguments in his motion to quash, Go reads Section 83 of RA 337 as penalizing a
director or officer of a banking institution for either borrowing the deposits or funds of the bank,
or guaranteeing or indorsing loans to others, but not for assuming both capacities. He claimed
that the prosecutions shotgun approach in alleging that he acted as borrower and/or guarantor
rendered the Information highly defective for failure to specify with certainty the specific act or
omission complained of. To petitioner Go, the prosecutions approach was a clear violation of
his constitutional right to be informed of the nature and cause of the accusation against him.
Additionally, Go reiterates his claim that credit accommodations by banks to their directors and
officers are legal and valid, provided that these are limited to their outstanding deposits and
book value of the paid-in capital contribution in the bank. The failure to state that he borrowed
deposits and/or guaranteed loans beyond this limit rendered the Information defective. He thus
asks the Court to reverse the CA decision to reinstate the criminal charge.
In its Comment,11 the prosecution raises the same defenses against Gos contentions. It insists
on the sufficiency of the allegations in the Information and prays for the denial of Gos petition.
THE COURTS RULING
The Court does not find the petition meritorious and accordingly denies it.
The Accuseds Right to be Informed
Under the Constitution, a person who stands charged of a criminal offense has the right to be
informed of the nature and cause of the accusation against him.12 The Rules of Court, in
implementing the right, specifically require that the acts or omissions complained of as
constituting the offense, including the qualifying and aggravating circumstances, must be stated
in ordinary and concise language, not necessarily in the language used in the statute, but in
terms sufficient to enable a person of common understanding to know what offense is being
charged and the attendant qualifying and aggravating circumstances present, so that the
accused can properly defend himself and the court can pronounce judgment.13 To broaden the
scope of the right, the Rules authorize the quashal, upon motion of the accused, of an
Information that fails to allege the acts constituting the offense.14 Jurisprudence has laid down
the fundamental test in appreciating a motion to quash an Information grounded on the
insufficiency of the facts alleged therein. We stated in People v. Romualdez15 that:
The determinative test in appreciating a motion to quash xxx is the sufficiency of the averments
in the information, that is, whether the facts alleged, if hypothetically admitted, would establish
the essential elements of the offense as defined by law without considering matters aliunde. As
Section 6, Rule 110 of the Rules of Criminal Procedure requires, the information only needs to
state the ultimate facts; the evidentiary and other details can be provided during the trial.
To restate the rule, an Information only needs to state the ultimate facts constituting the
offense, not the finer details of why and how the illegal acts alleged amounted to undue injury
or damage matters that are appropriate for the trial. [Emphasis supplied]
The facts and circumstances necessary to be included in the Information are determined by
reference to the definition and elements of the specific crimes. The Information must allege
clearly and accurately the elements of the crime charged.16
Elements of Violation of
Section 83 of RA 337
Under Section 83, RA 337, the following elements must be present to constitute a violation of
its first paragraph:
1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as representative or agent of another,
performs any of the following acts:
a. he borrows any of the deposits or funds of such bank; or
158

b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or
c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written approval of the majority of
the directors of the bank, excluding the offender, as the director concerned.
A simple reading of the above elements easily rejects Gos contention that the law penalizes a
bank director or officer only either for borrowing the banks deposits or funds or for guarantying
loans by the bank, but not for acting in both capacities. The essence of the crime is becoming an
obligor of the bank without securing the necessary written approval of the majority of the banks
directors.
The second element merely lists down the various modes of committing the offense. The third
mode, by declaring that "[no director or officer of any banking institution shall xxx] in any
manner be an obligor for money borrowed from the bank or loaned by it," in fact serves a catch-
all phrase that covers any situation when a director or officer of the bank becomes its obligor.
The prohibition is directed against a bank director or officer who becomes in any manner an
obligor for money borrowed from or loaned by the bank without the written approval of the
majority of the banks board of directors. To make a distinction between the act of borrowing
and guarantying is therefore unnecessary because in either situation, the director or officer
concerned becomes an obligor of the bank against whom the obligation is juridically
demandable.
The language of the law is broad enough to encompass either act of borrowing or guaranteeing,
or both. While the first paragraph of Section 83 is penal in nature, and by principle should be
strictly construed in favor of the accused, the Court is unwilling to adopt a liberal construction
that would defeat the legislatures intent in enacting the statute. The objective of the law should
allow for a reasonable flexibility in its construction. Section 83 of RA 337, as well as other banking
laws adopting the same prohibition,17 was enacted to ensure that loans by banks and similar
financial institutions to their own directors, officers, and stockholders are above board.18 Banks
were not created for the benefit of their directors and officers; they cannot use the assets of the
bank for their own benefit, except as may be permitted by law. Congress has thus deemed it
essential to impose restrictions on borrowings by bank directors and officers in order to protect
the public, especially the depositors.19 Hence, when the law prohibits directors and officers of
banking institutions from becoming in any manner an obligor of the bank (unless with the
approval of the board), the terms of the prohibition shall be the standards to be applied to
directors transactions such as those involved in the present case.
Credit accommodation limit is not an exception nor is it an element of the offense
Contrary to Gos claims, the second paragraph of Section 83, RA 337 does not provide for an
exception to a violation of the first paragraph thereof, nor does it constitute as an element of
the offense charged. Section 83 of RA 337 actually imposes three restrictions: approval,
reportorial, and ceiling requirements.
The approval requirement (found in the first sentence of the first paragraph of the law) refers
to the written approval of the majority of the banks board of directors required before bank
directors and officers can in any manner be an obligor for money borrowed from or loaned by
the bank. Failure to secure the approval renders the bank director or officer concerned liable
for prosecution and, upon conviction, subjects him to the penalty provided in the third sentence
of first paragraph of Section 83.
The reportorial requirement, on the other hand, mandates that any such approval should be
entered upon the records of the corporation, and a copy of the entry be transmitted to the
appropriate supervising department. The reportorial requirement is addressed to the bank
itself, which, upon its failure to do so, subjects it to quo warranto proceedings under Section 87
of RA 337.20
The ceiling requirement under the second paragraph of Section 83 regulates the amount of
credit accommodations that banks may extend to their directors or officers by limiting these to
an amount equivalent to the respective outstanding deposits and book value of the paid-in
capital contribution in the bank. Again, this is a requirement directed at the bank. In this light, a
prosecution for violation of the first paragraph of Section 83, such as the one involved here,
does not require an allegation that the loan exceeded the legal limit. Even if the loan involved is
below the legal limit, a written approval by the majority of the banks directors is still required;
otherwise, the bank director or officer who becomes an obligor of the bank is liable. Compliance
with the ceiling requirement does not dispense with the approval requirement.
Evidently, the failure to observe the three requirements under Section 83 paves the way for the
prosecution of three different offenses, each with its own set of elements. A successful
indictment for failing to comply with the approval requirement will not necessitate proof that
the other two were likewise not observed.
Rules of Court allow amendment of insufficient Information
Assuming that the facts charged in the Information do not constitute an offense, we find it
erroneous for the RTC to immediately order the dismissal of the Information, without giving the
prosecution a chance to amend it. Section 4 of Rule 117 states:
159

SEC. 4. Amendment of complaint or information.If the motion to quash is based on an alleged
defect of the complaint or information which can be cured by amendment, the court shall order
that an amendment be made.
If it is based on the ground that the facts charged do not constitute an offense, the prosecution
shall be given by the court an opportunity to correct the defect by amendment. The motion shall
be granted if the prosecution fails to make the amendment, or the complaint or information still
suffers from the same defect despite the amendment. [Emphasis supplied]
Although an Information may be defective because the facts charged do not constitute an
offense, the dismissal of the case will not necessarily follow. The Rules specifically require that
the prosecution should be given a chance to correct the defect; the court can order the dismissal
only upon the prosecutions failure to do so. The RTCs failure to provide the prosecution this
opportunity twice21 constitutes an arbitrary exercise of power that was correctly addressed by
the CA through the certiorari petition. This defect in the RTCs action on the case, while not
central to the issue before us, strengthens our conclusion that this criminal case should be
resolved through full-blown trial on the merits.
WHEREFORE, we DENY the petitioners petition for review on certiorari and AFFIRM the decision
of the Court of Appeals in CA-G.R. SP No. 79149, promulgated on October 26, 2006, as well as
its resolution of June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed to PROCEED
with the hearing of Criminal Case No. 99-178551. Costs against the petitioner.
SO ORDERED.
G.R. No. 162336 February 1, 2010
HILARIO P. SORIANO, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES, BANGKO SENTRAL NG PILIPINAS (BSP), PHILIPPINE DEPOSIT
INSURANCE CORPORATION (PDIC), PUBLIC PROSECUTOR ANTONIO C.BUAN, and STATE
PROSECUTOR ALBERTO R. FONACIER, Respondents.
DECISION
DEL CASTILLO, J.:
A bank officer violates the DOSRI2 law when he acquires bank funds for his personal benefit,
even if such acquisition was facilitated by a fraudulent loan application. Directors, officers,
stockholders, and their related interests cannot be allowed to interpose the fraudulent nature
of the loan as a defense to escape culpability for their circumvention of Section 83 of Republic
Act (RA) No. 337.3
Before us is a Petition for Review on Certiorari4 under Rule 45 of the Rules of Court, assailing
the September 26, 2003 Decision5 and the February 5, 2004 Resolution6 of the Court of Appeals
(CA) in CA-G.R. SP No. 67657. The challenged Decision disposed as follows:
WHEREFORE, premises considered, the instant petition for certiorari is hereby DENIED.7
Factual Antecedents
Sometime in 2000, the Office of Special Investigation (OSI) of the Bangko Sentral ng Pilipinas
(BSP), through its officers,8 transmitted a letter9 dated March 27, 2000 to Jovencito Zuo, Chief
State Prosecutor of the Department of Justice (DOJ). The letter attached as annexes five
affidavits,10 which would allegedly serve as bases for filing criminal charges for Estafa thru
Falsification of Commercial Documents, in relation to Presidential Decree (PD) No. 1689,11 and
for Violation of Section 83 of RA 337, as amended by PD 1795,12 against, inter alia, petitioner
herein Hilario P. Soriano. These five affidavits, along with other documents, stated that spouses
Enrico and Amalia Carlos appeared to have an outstanding loan of 8 million with the Rural Bank
of San Miguel (Bulacan), Inc. (RBSM), but had never applied for nor received such loan; that it
was petitioner, who was then president of RBSM, who had ordered, facilitated, and received the
proceeds of the loan; and that the 8 million loan had never been authorized by RBSM's Board
of Directors and no report thereof had ever been submitted to the Department of Rural Banks,
Supervision and Examination Sector of the BSP. The letter of the OSI, which was not subscribed
160
under oath, ended with a request that a preliminary investigation be conducted and the
corresponding criminal charges be filed against petitioner at his last known address.
Acting on the letter-request and its annexes, State Prosecutor Albert R. Fonacier proceeded with
the preliminary investigation. He issued a subpoena with the witnesses affidavits and
supporting documents attached, and required petitioner to file his counter-affidavit. In due
course, the investigating officer issued a Resolution finding probable cause and correspondingly
filed two separate informations against petitioner before the Regional Trial Court (RTC) of
Malolos, Bulacan.13
The first Information,14 dated November 14, 2000 and docketed as Criminal Case No. 237-M-
2001, was for estafa through falsification of commercial documents, under Article 315,
paragraph 1(b), of the Revised Penal Code (RPC), in relation to Article 172 of the RPC and PD
1689. It basically alleged that petitioner and his co-accused, in abuse of the confidence reposed
in them as RBSM officers, caused the falsification of a number of loan documents, making it
appear that one Enrico Carlos filled up the same, and thereby succeeded in securing a loan and
converting the loan proceeds for their personal gain and benefit.15 The information reads:
That in or about the month of April, 1997, and thereafter, in San Miguel, Bulacan, and within
the jurisdiction of this Honorable Court, the said accused HILARIO P. SORIANO and ROSALINDA
ILAGAN, as principals by direct participation, with unfaithfulness or abuse of confidence and
taking advantage of their position as President of the Rural Bank of San Miguel (Bulacan), Inc.
and Branch Manager of the Rural Bank of San Miguel San Miguel Branch [sic], a duly organized
banking institution under Philippine Laws, conspiring, confederating and mutually helping one
another, did then and there, willfully and feloniously falsify loan documents consisting of
undated loan application/information sheet, credit proposal dated April 14, 1997, credit
proposal dated April 22, 1997, credit investigation report dated April 15, 1997, promissory note
dated April 23, 1997, disclosure statement on loan/credit transaction dated April 23, 1997, and
other related documents, by making it appear that one Enrico Carlos filled up the
application/information sheet and filed the aforementioned loan documents when in truth and
in fact Enrico Carlos did not participate in the execution of said loan documents and that by
virtue of said falsification and with deceit and intent to cause damage, the accused succeeded
in securing a loan in the amount of eight million pesos (PhP8,000,000.00) from the Rural Bank
of San Miguel San Ildefonso branch in the name of Enrico Carlos which amount of PhP8 million
representing the loan proceeds the accused thereafter converted the same amount to their own
personal gain and benefit, to the damage and prejudice of the Rural Bank of San Miguel San
Ildefonso branch, its creditors, the Bangko Sentral ng Pilipinas, and the Philippine Deposit
Insurance Corporation.
CONTRARY TO LAW.16
The other Information17 dated November 10, 2000 and docketed as Criminal Case No. 238-M-
2001, was for violation of Section 83 of RA 337, as amended by PD 1795. The said provision
refers to the prohibition against the so-called DOSRI loans. The information alleged that, in his
capacity as President of RBSM, petitioner indirectly secured an 8 million loan with RBSM, for
his personal use and benefit, without the written consent and approval of the bank's Board of
Directors, without entering the said transaction in the bank's records, and without transmitting
a copy of the transaction to the supervising department of the bank. His ruse was facilitated by
placing the loan in the name of an unsuspecting RBSM depositor, one Enrico Carlos.18 The
information reads:
That in or about the month of April, 1997, and thereafter, and within the jurisdiction of this
Honorable Court, the said accused, in his capacity as President of the Rural Bank of San Miguel
(Bulacan), Inc., did then and there, willfully and feloniously indirectly borrow or secure a loan
with the Rural Bank of San Miguel San Ildefonso branch, a domestic rural banking institution
created, organized and existing under Philippine laws, amounting to eight million pesos
(PhP8,000,000.00), knowing fully well that the same has been done by him without the written
consent and approval of the majority of the board of directors of the said bank, and which
consent and approval the said accused deliberately failed to obtain and enter the same upon
the records of said banking institution and to transmit a copy thereof to the supervising
department of the said bank, as required by the General Banking Act, by using the name of one
depositor Enrico Carlos of San Miguel, Bulacan, the latter having no knowledge of the said loan,
and one in possession of the said amount of eight million pesos (PhP8,000,000.00), accused
converted the same to his own personal use and benefit, in flagrant violation of the said law.
CONTRARY TO LAW.19
Both cases were raffled to Branch 79 of the RTC of Malolos, Bulacan.20
On June 8, 2001, petitioner moved to quash21 these informations on two grounds: that the
court had no jurisdiction over the offense charged, and that the facts charged do not constitute
an offense.
On the first ground, petitioner argued that the letter transmitted by the BSP to the DOJ
constituted the complaint and hence was defective for failure to comply with the mandatory
requirements of Section 3(a), Rule 112 of the Rules of Court, such as the statement of address
of petitioner and oath and subscription.22 Moreover, petitioner argued that the officers of OSI,
who were the signatories to the "letter-complaint," were not authorized by the BSP Governor,
much less by the Monetary Board, to file the complaint. According to petitioner, this alleged
fatal oversight violated Section 18, pars. (c) and (d) of the New Central Bank Act (RA 7653).
161

On the second ground, petitioner contended that the commission of estafa under paragraph
1(b) of Article 315 of the RPC is inherently incompatible with the violation of DOSRI law (as set
out in Section 8323 of RA 337, as amended by PD 1795),24 hence a person cannot be charged
for both offenses. He argued that a violation of DOSRI law requires the offender to obtain a loan
from his bank, without complying with procedural, reportorial, or ceiling requirements. On the
other hand, estafa under par. 1(b), Article 315 of the RPC requires the offender to
misappropriate or convert something that he holds in trust, or on commission, or for
administration, or under any other obligation involving the duty to return the same.25
Essentially, the petitioner theorized that the characterization of possession is different in the
two offenses. If petitioner acquired the loan as DOSRI, he owned the loaned money and
therefore, cannot misappropriate or convert it as contemplated in the offense of estafa.
Conversely, if petitioner committed estafa, then he merely held the money in trust for someone
else and therefore, did not acquire a loan in violation of DOSRI rules.
Ruling of the Regional Trial Court
In an Order26 dated August 8, 2001, the trial court denied petitioner's Motion to Quash for lack
of merit. The lower court agreed with the prosecution that the assailed OSI letter was not the
complaint-affidavit itself; thus, it need not comply with the requirements under the Rules of
Court. The trial court held that the affidavits, which were attached to the OSI letter, comprised
the complaint-affidavit in the case. Since these affidavits were duly subscribed and sworn to
before a notary public, there was adequate compliance with the Rules. The trial court further
held that the two offenses were separate and distinct violations, hence the prosecution of one
did not pose a bar to the other.27
Petitioners Motion for Reconsideration was likewise denied in an Order dated September 5,
2001.28
Aggrieved, petitioner filed a Petition for Certiorari29 with the CA, reiterating his arguments
before the trial court.
Ruling of the Court of Appeals
The CA denied the petition on both issues presented by petitioner.
On the first issue, the CA determined that the BSP letter, which petitioner characterized to be a
fatally infirm complaint, was not actually a complaint, but a transmittal or cover letter only. This
transmittal letter merely contained a summary of the affidavits which were attached to it. It did
not contain any averment of personal knowledge of the events and transactions that constitute
the elements of the offenses charged. Being a mere transmittal letter, it need not comply with
the requirements of Section 3(a) of Rule 112 of the Rules of Court.30
The CA further determined that the five affidavits attached to the transmittal letter should be
considered as the complaint-affidavits that charged petitioner with violation of Section 83 of RA
337 and for Estafa thru Falsification of Commercial Documents. These complaint-affidavits
complied with the mandatory requirements set out in the Rules of Court they were subscribed
and sworn to before a notary public and subsequently certified by State Prosecutor Fonacier,
who personally examined the affiants and was convinced that the affiants fully understood their
sworn statements.31
Anent the second ground, the CA found no merit in petitioner's argument that the violation of
the DOSRI law and the commission of estafa thru falsification of commercial documents are
inherently inconsistent with each other. It explained that the test in considering a motion to
quash on the ground that the facts charged do not constitute an offense, is whether the facts
alleged, when hypothetically admitted, constitute the elements of the offense charged. The
appellate court held that this test was sufficiently met because the allegations in the assailed
informations, when hypothetically admitted, clearly constitute the elements of Estafa thru
Falsification of Commercial Documents and Violation of DOSRI law.32
Petitioners Motion for Reconsideration33 was likewise denied for lack of merit.
Hence, this petition.
Issues
Restated, petitioner raises the following issues34 for our consideration:
I
Whether the complaint complied with the mandatory requirements provided under Section
3(a), Rule 112 of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.
II
Whether a loan transaction within the ambit of the DOSRI law (violation of Section 83 of RA 337,
as amended) could also be the subject of Estafa under Article 315 (1) (b) of the Revised Penal
Code.
162
III
Is a petition for certiorari under Rule 65 the proper remedy against an Order denying a Motion
to Quash?
IV
Whether petitioner is entitled to a writ of injunction.
Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with the mandatory requirements provided under Section
3(a), Rule 112 of the Rules of Court and Section 18, paragraphs (c) and (d) of
Republic Act No. 7653
Petitioner moved to withdraw the first issue from the instant petition
On March 5, 2007, the Court noted35 petitioner's Manifestation and Motion for Partial
Withdrawal of the Petition36 dated February 7, 2007. In the said motion, petitioner informed
the Court of the promulgation of a Decision entitled Soriano v. Hon. Casanova,37 which also
involved petitioner and similar BSP letters to the DOJ. According to petitioner, the said Decision
allegedly ruled squarely on the nature of the BSP letters and the validity of the sworn affidavits
attached thereto. For this reason, petitioner moved for the partial withdrawal of the instant
petition insofar as it involved the issue of "whether or not a court can legally acquire jurisdiction
over a complaint which failed to comply with the mandatory requirements provided under
Section 3(a), Rule 112 of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653".38
Given that the case had already been submitted for resolution of the Court when petitioner filed
his latest motion, and that all respondents had presented their positions and arguments on the
first issue, the Court deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held that the affidavits attached to the BSP transmittal
letter complied with the mandatory requirements under the Rules of Court.
To be sure, the BSP letters involved in Soriano v. Hon. Casanova39 are not the same as the BSP
letter involved in the instant case. However, the BSP letters in Soriano v. Hon. Casanova and the
BSP letter subject of this case are similar in the sense that they are all signed by the OSI officers
of the BSP, they were not sworn to by the said officers, they all contained summaries of their
attached affidavits, and they all requested the conduct of a preliminary investigation and the
filing of corresponding criminal charges against petitioner Soriano. Thus, the principle of stare
decisis dictates that the ruling in Soriano v. Hon. Casanova be applied in the instant case once
a question of law has been examined and decided, it should be deemed settled and closed to
further argument.40
We held in Soriano v. Hon. Casanova, after a close scrutiny of the letters transmitted by the BSP
to the DOJ, that these were not intended to be the complaint, as envisioned under the Rules.
They did not contain averments of personal knowledge of the events and transactions
constitutive of any offense. The letters merely transmitted for preliminary investigation the
affidavits of people who had personal knowledge of the acts of petitioner. We ruled that these
affidavits, not the letters transmitting them, initiated the preliminary investigation. Since these
affidavits were subscribed under oath by the witnesses who executed them before a notary
public, then there was substantial compliance with Section 3(a), Rule 112 of the Rules of Court.
Anent the contention that there was no authority from the BSP Governor or the Monetary Board
to file a criminal case against Soriano, we held that the requirements of Section 18, paragraphs
(c) and (d) of RA 7653 did not apply because the BSP did not institute the complaint but merely
transmitted the affidavits of the complainants to the DOJ.
We further held that since the offenses for which Soriano was charged were public crimes,
authority holds that it can be initiated by "any competent person" with personal knowledge of
the acts committed by the offender. Thus, the witnesses who executed the affidavits clearly fell
within the purview of "any competent person" who may institute the complaint for a public
crime.
The ruling in Soriano v. Hon. Casanova has been adopted and elaborated upon in the recent case
of Santos-Concio v. Department of Justice.41 Instead of a transmittal letter from the BSP, the
Court in Santos-Concio was faced with an NBI-NCR Report, likewise with affidavits of witnesses
as attachments. Ruling on the validity of the witnesses sworn affidavits as bases for a
preliminary investigation, we held:
The Court is not unaware of the practice of incorporating all allegations in one document
denominated as "complaint-affidavit." It does not pronounce strict adherence to only one
approach, however, for there are cases where the extent of ones personal knowledge may not
cover the entire gamut of details material to the alleged offense. The private offended party or
163
relative of the deceased may not even have witnessed the fatality, in which case the peace
officer or law enforcer has to rely chiefly on affidavits of witnesses. The Rules do not in fact
preclude the attachment of a referral or transmittal letter similar to that of the NBI-NCR. Thus,
in Soriano v. Casanova, the Court held:
A close scrutiny of the letters transmitted by the BSP and PDIC to the DOJ shows that these were
not intended to be the complaint envisioned under the Rules. It may be clearly inferred from
the tenor of the letters that the officers merely intended to transmit the affidavits of the bank
employees to the DOJ. Nowhere in the transmittal letters is there any averment on the part of
the BSP and PDIC officers of personal knowledge of the events and transactions constitutive of
the criminal violations alleged to have been made by the accused. In fact, the letters clearly
stated that what the OSI of the BSP and the LIS of the PDIC did was to respectfully transmit to
the DOJ for preliminary investigation the affidavits and personal knowledge of the acts of the
petitioner. These affidavits were subscribed under oath by the witnesses who executed them
before a notary public. Since the affidavits, not the letters transmitting them, were intended to
initiate the preliminary investigation, we hold that Section 3(a), Rule 112 of the Rules of Court
was substantially complied with.
Citing the ruling of this Court in Ebarle v. Sucaldito, the Court of Appeals correctly held that a
complaint for purposes of preliminary investigation by the fiscal need not be filed by the
offended party. The rule has been that, unless the offense subject thereof is one that cannot be
prosecuted de oficio, the same may be filed, for preliminary investigation purposes, by any
competent person. The crime of estafa is a public crime which can be initiated by "any
competent person." The witnesses who executed the affidavits based on their personal
knowledge of the acts committed by the petitioner fall within the purview of "any competent
person" who may institute the complaint for a public crime. x x x (Emphasis and italics supplied)
A preliminary investigation can thus validly proceed on the basis of an affidavit of any competent
person, without the referral document, like the NBI-NCR Report, having been sworn to by the
law enforcer as the nominal complainant. To require otherwise is a needless exercise. The cited
case of Oporto, Jr. v. Judge Monserate does not appear to dent this proposition. After all, what
is required is to reduce the evidence into affidavits, for while reports and even raw information
may justify the initiation of an investigation, the preliminary investigation stage can be held only
after sufficient evidence has been gathered and evaluated which may warrant the eventual
prosecution of the case in court.42
Following the foregoing rulings in Soriano v. Hon. Casanova and Santos-Concio v. Department
of Justice, we hold that the BSP letter, taken together with the affidavits attached thereto,
comply with the requirements provided under Section 3(a), Rule 112 of the Rules of Court and
Section 18, paragraphs (c) and (d) of RA 7653.
Second Issue:
Whether a loan transaction within the ambit of the DOSRI law (violation of Section 83 of RA 337,
as amended) could be the subject of Estafa under Article 315 (1) (b) of the
Revised Penal Code
The second issue was raised by petitioner in the context of his Motion to Quash Information on
the ground that the facts charged do not constitute an offense.43 It is settled that in considering
a motion to quash on such ground, the test is "whether the facts alleged, if hypothetically
admitted, would establish the essential elements of the offense charged as defined by law. The
trial court may not consider a situation contrary to that set forth in the criminal complaint or
information. Facts that constitute the defense of the petitioner[s] against the charge under the
information must be proved by [him] during trial. Such facts or circumstances do not constitute
proper grounds for a motion to quash the information on the ground that the material
averments do not constitute the offense". 44
We have examined the two informations against petitioner and we find that they contain
allegations which, if hypothetically admitted, would establish the essential elements of the
crime of DOSRI violation and estafa thru falsification of commercial documents.
In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the information alleged that
petitioner Soriano was the president of RBSM; that he was able to indirectly obtain a loan from
RBSM by putting the loan in the name of depositor Enrico Carlos; and that he did this without
complying with the requisite board approval, reportorial, and ceiling requirements.
In Criminal Case No. 237-M-2001 for estafa thru falsification of commercial documents, the
information alleged that petitioner, by taking advantage of his position as president of RBSM,
falsified various loan documents to make it appear that an Enrico Carlos secured a loan of 8
million from RBSM; that petitioner succeeded in obtaining the loan proceeds; that he later
converted the loan proceeds to his own personal gain and benefit; and that his action caused
damage and prejudice to RBSM, its creditors, the BSP, and the PDIC.
Significantly, this is not the first occasion that we adjudge the sufficiency of similarly worded
informations. In Soriano v. People,45 involving the same petitioner in this case (but different
transactions), we also reviewed the sufficiency of informations for DOSRI violation and estafa
thru falsification of commercial documents, which were almost identical, mutatis mutandis, with
the subject informations herein. We held in Soriano v. People that there is no basis for the
164
quashal of the informations as "they contain material allegations charging Soriano with violation
of DOSRI rules and estafa thru falsification of commercial documents".
Petitioner raises the theory that he could not possibly be held liable for estafa in concurrence
with the charge for DOSRI violation. According to him, the DOSRI charge presupposes that he
acquired a loan, which would make the loan proceeds his own money and which he could
neither possibly misappropriate nor convert to the prejudice of another, as required by the
statutory definition of estafa.46 On the other hand, if petitioner did not acquire any loan, there
can be no DOSRI violation to speak of. Thus, petitioner posits that the two offenses cannot co-
exist. This theory does not persuade us.
Petitioners theory is based on the false premises that the loan was extended to him by the bank
in his own name, and that he became the owner of the loan proceeds. Both premises are wrong.
The bank money (amounting to 8 million) which came to the possession of petitioner was
money held in trust or administration by him for the bank, in his
fiduciary capacity as the President of said bank.47 It is not accurate to say that petitioner
became the owner of the 8 million because it was the proceeds of a loan. That would have
been correct if the bank knowingly extended the loan to petitioner himself. But that is not the
case here. According to the information for estafa, the loan was supposed to be for another
person, a certain "Enrico Carlos"; petitioner, through falsification, made it appear that said
"Enrico Carlos" applied for the loan when in fact he ("Enrico Carlos") did not. Through such
fraudulent device, petitioner obtained the loan proceeds and converted the same. Under these
circumstances, it cannot be said that petitioner became the legal owner of the 8 million. Thus,
petitioner remained the banks fiduciary with respect to that money, which makes it capable of
misappropriation or conversion in his hands.
The next question is whether there can also be, at the same time, a charge for DOSRI violation
in such a situation wherein the accused bank officer did not secure a loan in his own name, but
was alleged to have used the name of another person in order to indirectly secure a loan from
the bank. We answer this in the affirmative. Section 83 of RA 337 reads:
Section 83. No director or officer of any banking institution shall, either directly or indirectly, for
himself or as the representative or agent of others, borrow any of the deposits of funds of such
bank, nor shall he become a guarantor, indorser, or surety for loans from such bank to others,
or in any manner be an obligor for moneys borrowed from the bank or loaned by it, except with
the written approval of the majority of the directors of the bank, excluding the director
concerned. Any such approval shall be entered upon the records of the corporation and a copy
of such entry shall be transmitted forthwith to the Superintendent of Banks. The office of any
director or officer of a bank who violates the provisions of this section shall immediately become
vacant and the director or officer shall be punished by imprisonment of not less than one year
nor more than ten years and by a fine of not less than one thousand nor more than ten thousand
pesos. x x x
The prohibition in Section 83 is broad enough to cover various modes of borrowing.[48] It covers
loans by a bank director or officer (like herein petitioner) which are made either: (1) directly, (2)
indirectly, (3) for himself, (4) or as the representative or agent of others. It applies even if the
director or officer is a mere guarantor, indorser or surety for someone else's loan or is in any
manner an obligor for money borrowed from the bank or loaned by it. The covered transactions
are prohibited unless the approval, reportorial and ceiling requirements under Section 83 are
complied with. The prohibition is intended to protect the public, especially the depositors,[49]
from the overborrowing of bank funds by bank officers, directors, stockholders and related
interests, as such overborrowing may lead to bank failures.[50] It has been said that "banking
institutions are not created for the benefit of the directors [or officers]. While directors have
great powers as directors, they have no special privileges as individuals. They cannot use the
assets of the bank for their own benefit except as permitted by law. Stringent restrictions are
placed about them so that when acting both for the bank and for one of themselves at the same
time, they must keep within certain prescribed lines regarded by the legislature as essential to
safety in the banking business".51
A direct borrowing is obviously one that is made in the name of the DOSRI himself or where the
DOSRI is a named party, while an indirect borrowing includes one that is made by a third party,
but the DOSRI has a stake in the transaction.52 The latter type indirect borrowing applies
here. The information in Criminal Case 238-M-2001 alleges that petitioner "in his capacity as
President of Rural Bank of San Miguel San Ildefonso branch x x x indirectly borrow[ed] or
secure[d] a loan with [RBSM] x x x knowing fully well that the same has been done by him
without the written consent and approval of the majority of the board of directors x x x, and
which consent and approval the said accused deliberately failed to obtain and enter the same
upon the records of said banking institution and to transmit a copy thereof to the supervising
department of the said bank x x x by using the name of one depositor Enrico Carlos x x x, the
latter having no knowledge of the said loan, and once in possession of the said amount of eight
million pesos (8 million), [petitioner] converted the same to his own personal use and
benefit".53
The foregoing information describes the manner of securing the loan as indirect; names
petitioner as the benefactor of the indirect loan; and states that the requirements of the law
were not complied with. It contains all the required elements54 for a violation of Section 83,
even if petitioner did not secure the loan in his own name.
165
The broad interpretation of the prohibition in Section 83 is justified by the fact that it even
expressly covers loans to third parties where the third parties are aware of the transaction (such
as principals represented by the DOSRI), and where the DOSRIs interest does not appear to be
beneficial but even burdensome (such as in cases when the DOSRI acts as a mere guarantor or
surety). If the law finds it necessary to protect the bank and the banking system in such
situations, it will surely be illogical for it to exclude a case like this where the DOSRI acted for his
own benefit, using the name of an unsuspecting person. A contrary interpretation will effectively
allow a DOSRI to use dummies to circumvent the requirements of the law.
issuance of an injunctive writ because it effectively disposes of the main case without trial
and/or due process.58 In Olalia v. Hizon,59 the Court held as follows:
It has been consistently held that there is no power the exercise of which is more delicate, which
requires greater caution, deliberation and sound discretion, or more dangerous in a doubtful
case, than the issuance of an injunction. It is the strong arm of equity that should never be
extended unless to cases of great injury, where courts of law cannot afford an adequate or
commensurate remedy in damages.

In sum, the informations filed against petitioner do not negate each other. Every court should remember that an injunction is a limitation upon the freedom of action of
the [complainant] and should not be granted lightly or precipitately. It should be granted only
Third Issue: when the court is fully satisfied that the law permits it and the emergency demands it.

Is a Rule 65 petition for certiorari the proper remedy against an Order denying a Motion to Given this Court's findings in the earlier issues of the instant case, we find no compelling reason
Quash? to grant the injunctive relief sought by petitioner.

This issue may be speedily resolved by adopting our ruling in Soriano v. People,55 where we WHEREFORE, the petition is DENIED. The assailed September 26, 2003 Decision as well as the
held: February 5, 2004 Resolution of the Court of Appeals in CA-G.R. SP No. 67657 are AFFIRMED.
Costs against petitioner.
In fine, the Court has consistently held that a special civil action for certiorari is not the proper
remedy to assail the denial of a motion to quash an information. The proper procedure in such SO ORDERED.
a case is for the accused to enter a plea, go to trial without prejudice on his part to present the
special defenses he had invoked in his motion to quash and if after trial on the merits, an adverse
decision is rendered, to appeal therefrom in the manner authorized by law. Thus, petitioners
should not have forthwith filed a special civil action for certiorari with the CA and instead, they
should have gone to trial and reiterated the special defenses contained in their motion to quash.
There are no special or exceptional circumstances in the present case that would justify
immediate resort to a filing of a petition for certiorari. Clearly, the CA did not commit any
reversible error, much less, grave abuse of discretion in dismissing the petition.56

Fourth Issue:

Whether petitioner is entitled to a writ of injunction

The requisites to justify an injunctive relief are: (1) the right of the complainant is clear and
unmistakable; (2) the invasion of the right sought to be protected is material and substantial;
and (3) there is an urgent and paramount necessity for the writ to prevent serious damage. A
clear legal right means one clearly founded in or granted by law or is "enforceable as a matter
of law." Absent any clear and unquestioned legal right, the issuance of an injunctive writ would
constitute grave abuse of discretion.57 Caution and prudence must, at all times, attend the

166
 G.R. No. 155001 May 5, 2003
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL
ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON,
CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO,
MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE
AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS
CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT
SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR
AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION,
petitioners-in-intervention,
x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA, petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT
OF PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as
Head of the Department of Transportation and Communications, and SECRETARY SIMEON A.
DATUMANONG, in his capacity as Head of the Department of Public Works and Highways,
respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON VILLARAMA,
PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and BENASING
O. MACARANBON, respondents-intervenors,
x---------------------------------------------------------x
G.R. No. 155661 May 5, 2003
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V. GAERLAN,
LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO
SANTOS, MA. LUISA M. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG
PILIPINAS (SMPP), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents.
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule
65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority
(MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary
from implementing the following agreements executed by the Philippine Government through
the DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the
Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession
Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and
Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the
Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO
Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a
comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether
the present airport can cope with the traffic development up to the year 2010. The study
consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future
requirements, proposed master plans and development plans; and second, presentation of the
preliminary design of the passenger terminal building. The ADP submitted a Draft Final Report
to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry
Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to
explore the possibility of investing in the construction and operation of a new international
airport terminal. To signify their commitment to pursue the project, they formed the Asia's
Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
167
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III)
under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718
(BOT Law).1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification
Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the
National Economic and Development Authority (NEDA). A revised proposal, however, was
forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA
Investment Coordinating Council (NEDA ICC) Technical Board favorably endorsed the project
to the ICC Cabinet Committee which approved the same, subject to certain conditions, on
January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which
approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an
invitation for competitive or comparative proposals on AEDC's unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to
submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first
envelope should contain the Prequalification Documents, the second envelope the Technical
Proposal, and the third envelope the Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were
permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon
submission of a written application and payment of a non-refundable fee of P50,000.00
(US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must have
adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be
evaluated based on its ability to provide a minimum amount of equity to the project, and its
capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference
on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The
following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial
proposal an additional percentage of gross revenue share of the Government, as follows:
i. First 5 years
5.0%
ii. Next 10 years
7.5%
iii. Next 10 years
10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge.
Proponent may offer an Annual Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing requirement
for the detailed engineering, design, construction, and/or operation and maintenance phases of
the project as the case may be. For purposes of pre-qualification, this capability shall be
measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the
minimum amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or the
members of the consortium are banking with them, that the project proponent and/or the
members are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponent's compliance with the minimum
technical and financial requirements provided in the Bid Documents and the IRR of the BOT Law.
The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponent's proposal.
168
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were
made. Upon the request of prospective bidder People's Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and
Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by the
challengers would be revealed to AEDC, and that the challengers' technical and financial
proposals would remain confidential. The PBAC also clarified that the list of revenue sources
contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue
sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore,
the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be
subject to regulation, and those charges which would be actually deemed Public Utility Fees
could still be revised, depending on the outcome of PBAC's query on the matter with the
Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargo's queries and the PBAC's
responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement
as prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each
member company is so structured to meet the requirements and needs of their current
respective business undertaking/activities. In order to comply with this equity requirement,
Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint Venture
to just execute an agreement that embodies a commitment to infuse the required capital in case
the project is awarded to the Joint Venture instead of increasing each corporation's current
authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in one's financial capability at the time of
prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that
"present" financial capability. However, total financial capability of all member companies of
the Consortium, to be established by submitting the respective companies' audited financial
statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension of a
Performance Security to the joint venture in the event that the Concessions Agreement (sic) is
awarded to them. However, Paircargo is being required to submit a copy of the draft concession
as one of the documentary requirements. Therefore, Paircargo is requesting that they'd (sic) be
furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the
soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any material
changes would be made known to prospective challengers through bid bulletins. However, a
final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo and Warehousing Co.,
Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On
September 23, 1996, the PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day, September 24, 1996, the PBAC
prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the
Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount
that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification
purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement
in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues
raised by the latter, and that based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that the challenger, Paircargo, had
prequalified to undertake the project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium
which contained its Technical Proposal.
169

On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo's
financial capability, in view of the restrictions imposed by Section 21-B of the General Banking
Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial
Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it
be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation
report where each of the issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo
Consortium containing their respective financial proposals. Both proponents offered to build
the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to
pay the government: 5% share in gross revenues for the first five years of operation, 7.5% share
in gross revenues for the next ten years of operation, and 10% share in gross revenues for the
last ten years of operation, in accordance with the Bid Documents. However, in addition to the
foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment
for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion
for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by
the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC's
failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport
Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its
objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval
of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of
Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity
as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a
no-objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad referendum
gathered only four (4) of the required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO,
through its President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-
and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III"
(1997 Concession Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees, rentals and other
charges in accordance with the rates or schedules stipulated in the 1997 Concession Agreement.
The Agreement provided that the concession period shall be for twenty-five (25) years
commencing from the in-service date, and may be renewed at the option of the Government
for a period not exceeding twenty-five (25) years. At the end of the concession period, PIATCO
shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that
were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate of
completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with
the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the assignment
by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the
proceeds of Concessionaire's insurance; Sec. 5.10 with respect to the temporary take-over of
operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied
on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and
charges; the entire Article VIII concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy
arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and
the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or "Gross
Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient
funds for the upkeep, maintenance, repair and/or replacement of all airport facilities and
equipment which are owned or operated by MIAA; and further providing additional special
obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the ARCA.
The First Supplement also provided a stipulation as regards the construction of a surface road
170
to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing
Runway 13/31; the swapping of obligations between GRP and PIATCO regarding the
improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of
the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an
introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of
Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal,
demolition or disposal of subterranean structures uncovered or discovered at the site of the
construction of the terminal by the Concessionaire. It defined the scope of works; it provided
for the procedure for the demolition of the said structures and the consideration for the same
which the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential
costs and losses consequent to the existence of such structures; and it provided for some
additional obligations on the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the
construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing, and
other services, to several international airlines at the NAIA. Some of these service providers are
the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor,
DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the
industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming that
they stand to lose their employment upon the implementation of the questioned agreements,
filed before this Court a petition for prohibition to enjoin the enforcement of said agreements.2
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a
motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula
filed a similar petition with this Court.3
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the
legality of the various agreements.4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes,
Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast
Abayon and Benasing O. Macaranbon, moved to intervene in the case as Respondents-
Intervenors. They filed their Comment-In-Intervention defending the validity of the assailed
agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang
Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branch's legal
offices have concluded (as) null and void."5
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002.
The Office of the Solicitor General and the Office of the Government Corporate Counsel filed
their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument,
the Court then resolved in open court to require the parties to file simultaneously their
respective Memoranda in amplification of the issues heard in the oral arguments within 30 days
and to explore the possibility of arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and that
judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the
Supplements thereto void for being contrary to the Constitution, the BOT Law and its
Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce,
International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of
the ICC against the Government of the Republic of the Philippines acting through the DOTC and
MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues made
difficult by their intersecting legal and economic implications. The Court is aware of the far
reaching fall out effects of the ruling which it makes today. For more than a century and
whenever the exigencies of the times demand it, this Court has never shirked from its solemn
duty to dispense justice and resolve "actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction."6 To be sure, this Court will not begin to
do otherwise today.
171

We shall first dispose of the procedural issues raised by respondent PIATCO which they allege
will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service providers7 having
separate concession contracts with MIAA and continuing service agreements with various
international airlines to provide in-flight catering, passenger handling, ramp and ground
support, aircraft maintenance and provisions, cargo handling and warehousing and other
services. Also included as petitioners are labor unions MIASCOR Workers Union-National Labor
Union and Philippine Airlines Employees Association. These petitioners filed the instant action
for prohibition as taxpayers and as parties whose rights and interests stand to be violated by the
implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo handling and warehousing and
other services to several international airlines at the Ninoy Aquino International Airport.
Petitioners-Intervenors allege that as tax-paying international airline and airport-related service
operators, each one of them stands to be irreparably injured by the implementation of the
PIATCO Contracts. Each of the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they allege are being
interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa
Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive
bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition
on the nullity of the contracts entered into by the Government and PIATCO regarding the build-
operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who
have a legitimate interest to protect in the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations
which directly contravene numerous provisions of the Constitution, specific provisions of the
BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that
the DOTC and the MIAA, by entering into said contracts, have committed grave abuse of
discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of
prohibition, there being no plain, speedy or adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA
which grant PIATCO the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international airports already existing at the
time of the execution of the agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government shall cause the closure of
Ninoy Aquino International Airport Passenger Terminals I and II as international passenger
terminals. With respect to existing concession agreements between MIAA and international
airport service providers regarding certain services or operations, the 1997 Concession
Agreement and the ARCA uniformly provide that such services or operations will not be carried
over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except
through a separate agreement duly entered into with PIATCO.8
With respect to the petitioning service providers and their employees, upon the commencement
of operations of the NAIA IPT III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II as all international airlines
and passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be
compelled to contract with PIATCO alone for such services, with no assurance that subsisting
contracts with MIAA and other international airlines will be respected. Petitioning service
providers stress that despite the very competitive market, the substantial capital investments
required and the high rate of fees, they entered into their respective contracts with the MIAA
with the understanding that the said contracts will be in force for the stipulated period, and
thereafter, renewed so as to allow each of the petitioning service providers to recoup their
investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA
on the other hand allege that with the closure of the NAIA Terminals I and II as international
passenger terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have "alleged such a personal stake in
the outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions."9 Accordingly, it has been held that the interest of a person assailing
the constitutionality of a statute must be direct and personal. He must be able to show, not only
that the law or any government act is invalid, but also that he sustained or is in imminent danger
of sustaining some direct injury as a result of its enforcement, and not merely that he suffers
thereby in some indefinite way. It must appear that the person complaining has been or is about
172
to be denied some right or privilege to which he is lawfully entitled or that he is about to be
subjected to some burdens or penalties by reason of the statute or act complained of.10
We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners
have a direct and substantial interest to protect by reason of the implementation of the PIATCO
Contracts. They stand to lose their source of livelihood, a property right which is zealously
protected by the Constitution. Moreover, subsisting concession agreements between MIAA and
petitioners-intervenors and service contracts between international airlines and petitioners-
intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the
PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on petitioners
and petitioners-intervenors in these cases are legitimate interests sufficient to confer on them
the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO Contracts, because the contracts
compel the Government and/or the House of Representatives to appropriate funds necessary
to comply with the provisions therein.11 They cite provisions of the PIATCO Contracts which
require disbursement of unappropriated amounts in compliance with the contractual
obligations of the Government. They allege that the Government obligations in the PIATCO
Contracts which compel government expenditure without appropriation is a curtailment of their
prerogatives as legislators, contrary to the mandate of the Constitution that "[n]o money shall
be paid out of the treasury except in pursuance of an appropriation made by law."12
Standing is a peculiar concept in constitutional law because in some cases, suits are not brought
by parties who have been personally injured by the operation of a law or any other government
act but by concerned citizens, taxpayers or voters who actually sue in the public interest.
Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of Imus13 and
Gonzales v. Raquiza14 wherein this Court held that appropriation must be made only on
amounts immediately demandable, public interest demands that we take a more liberal view in
determining whether the petitioners suing as legislators, taxpayers and citizens have locus
standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,15 this Court held "[i]n line with
the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and
even association of planters, and non-profit civic organizations were allowed to initiate and
prosecute actions before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or instrumentalities."16 Further,
"insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to
whether or not it should be entertained."17 As such ". . . even if, strictly speaking, they [the
petitioners] are not covered by the definition, it is still within the wide discretion of the Court to
waive the requirement and so remove the impediment to its addressing and resolving the
serious constitutional questions raised."18 In view of the serious legal questions involved and
their impact on public interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO
alleges that submission of this controversy to this Court at the first instance is a violation of the
rule on hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this
Court with respect to a special civil action for prohibition and hence, following the rule on
hierarchy of courts, resort must first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the view
that the crux of the instant controversy involves significant legal questions. The facts necessary
to resolve these legal questions are well established and, hence, need not be determined by a
trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over
the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in
the appropriate courts or where exceptional and compelling circumstances justify availment of
a remedy within and calling for the exercise of this Court's primary jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar that call for the
relaxation of the rule. Both petitioners and respondents agree that these cases are of
transcendental importance as they involve the construction and operation of the country's
premier international airport. Moreover, the crucial issues submitted for resolution are of first
impression and they entail the proper legal interpretation of key provisions of the Constitution,
the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the
controversy before the Court, procedural bars may be lowered to give way for the speedy
disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
173
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance
of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust
this Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that the arbitration
clause in the Distributorship Agreement in question is valid and the dispute between the parties
is arbitrable, this Court affirmed the trial court's decision denying petitioner's Motion to
Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling, this
Court held that as contracts produce legal effect between the parties, their assigns and heirs,
only the parties to the Distributorship Agreement are bound by its terms, including the
arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be
called for but only with respect to the parties to the contract in question. Considering that there
are parties to the case who are neither parties to the Distributorship Agreement nor heirs or
assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty
Corporation,21 held that to tolerate the splitting of proceedings by allowing arbitration as to
some of the parties on the one hand and trial for the others on the other hand would, in effect,
result in multiplicity of suits, duplicitous procedure and unnecessary delay.22 Thus, we ruled
that the interest of justice would best be served if the trial court hears and adjudicates the case
in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests in
the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they
cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be
compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the
critical issues in the present controversy, including those raised by petitioners, cannot be made
before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious
determination of a dispute. This objective would not be met if this Court were to allow the
parties to settle the cases by arbitration as there are certain issues involving non-parties to the
PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's predecessor, was not a duly
pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium
failed to meet the financial capability required under the BOT Law and the Bid Documents. They
allege that in computing the ability of the Paircargo Consortium to meet the minimum equity
requirements for the project, the entire net worth of Security Bank, a member of the
consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996
issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is
found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity
requirements of the project. The said Memorandum was in response to a letter from Mr.
Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the
Paircargo Consortium on the ground that it does not have the financial resources to put up the
required minimum equity of P2,700,000,000.00. This contention is based on the restriction
under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot
invest in any single enterprise in an amount more than 15% of its net worth. In the said
Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial
capability will be evaluated based on total financial capability of all the member companies of
the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined
net worth of P3,926,421,242.00 that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted." To impose that as a
requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial capability.
As stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the amount of
the money to be used to answer the required thirty percent (30%) equity of the challenger but
rather to be used in establishing if there is enough basis to believe that the challenger can
comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the
conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for pre-qualification
(Section 5.4 of the same document).23
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be
awarded to the bidder "who, having satisfied the minimum financial, technical, organizational
and legal standards" required by the law, has submitted the lowest bid and most favorable terms
of the project.24 Further, the 1994 Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
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xxx xxx xxx
c. Financial Capability: The project proponent must have adequate capability to sustain the
financing requirements for the detailed engineering design, construction and/or operation and
maintenance phases of the project, as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of (i) proof of the ability of the project proponent and/or
the consortium to provide a minimum amount of equity to the project, and (ii) a letter
testimonial from reputable banks attesting that the project proponent and/or members of the
consortium are banking with them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall determine on a project-to-
project basis and before pre-qualification, the minimum amount of equity needed. (emphasis
supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending
the financial capability requirements for pre-qualification of the project proponent as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent to the minimum
technical and financial requirements provided in the Bid Documents and in the IRR of the BOT
Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponent's financial capability will be based shall
be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in
Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of
70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project
financing should not exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger
to the unsolicited proposal of AEDC has to show that it possesses the requisite financial
capability to undertake the project in the minimum amount of 30% of the project cost through
(i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter
testimonial from reputable banks attesting that the project proponent or members of the
consortium are banking with them, that they are in good financial standing, and that they have
adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or roughly
P9,183,650,000.00,25 the Paircargo Consortium had to show to the satisfaction of the PBAC that
it had the ability to provide the minimum equity for the project in the amount of at least
P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth
of P2,783,592.00 and P3,123,515.00 respectively.26 PAGS' Audited Financial Statements as of
1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the project.27
Security Bank's Audited Financial Statements as of 1995 show that it has a net worth equivalent
to its capital funds in the amount of P3,523,504,377.00.28
We agree with public respondents that with respect to Security Bank, the entire amount of its
net worth could not be invested in a single undertaking or enterprise, whether allied or non-
allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the
Monetary Board, whenever it shall deem appropriate and necessary to further national
development objectives or support national priority projects, may authorize a commercial bank,
a bank authorized to provide commercial banking services, as well as a government-owned and
controlled bank, to operate under an expanded commercial banking authority and by virtue
thereof exercise, in addition to powers authorized for commercial banks, the powers of an
Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied
undertaking, or own a majority or all of the equity in a financial intermediary other than a
commercial bank or a bank authorized to provide commercial banking services: Provided, That
(a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the
bank; (b) the equity investment in any one enterprise whether allied or non-allied shall not
exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank,
or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed
thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five
percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks
shall be deducted from the investing bank's net worth for purposes of computing the prescribed
ratio of net worth to risk assets.
xxx xxx xxx
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions
shall also apply regarding equity investments of banks.
175
a. In any single enterprise. The equity investments of banks in any single enterprise shall not
exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in
Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium
is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore
of the Paircargo Consortium, after considering the maximum amounts that may be validly
invested by each of its members is P558,384,871.55 or only 6.08% of the project cost,29 an
amount substantially less than the prescribed minimum equity investment required for the
project in the amount of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest
opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidder's
financial capacity at the pre-qualification stage, the law requires the government agency to
examine and determine the ability of the bidder to fund the entire cost of the project by
considering the maximum amounts that each bidder may invest in the project at the time of
pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in
the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity
ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC
should determine the maximum amounts that each member of the consortium may commit for
the construction, operation and maintenance of the NAIA IPT III project at the time of pre-
qualification. With respect to Security Bank, the maximum amount which may be invested by it
would only be 15% of its net worth in view of the restrictions imposed by the General Banking
Act. Disregarding the investment ceilings provided by applicable law would not result in a proper
evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents
and purposes, such ceiling or legal restriction determines the true maximum amount which a
bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the project
requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted
based on the required documents presented by the bidder. The PBAC should not be allowed to
speculate on the future financial ability of the bidder to undertake the project on the basis of
documents submitted. This would open doors to abuse and defeat the very purpose of a public
bidding. This is especially true in the case at bar which involves the investment of billions of
pesos by the project proponent. The relevant government authority is duty-bound to ensure
that the awardee of the contract possesses the minimum required financial capability to
complete the project. To allow the PBAC to estimate the bidder's future financial capability
would not secure the viability and integrity of the project. A restrictive and conservative
application of the rules and procedures of public bidding is necessary not only to protect the
impartiality and regularity of the proceedings but also to ensure the financial and technical
reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the foundation of a
fair and competitive public bidding would be defeated. Strict observance of the rules,
regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and
competitive public bidding.30
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the
bids are submitted falls short of the minimum amounts required to be put up by the bidder, said
bidder should be properly disqualified. Considering that at the pre-qualification stage, the
maximum amounts which the Paircargo Consortium may invest in the project fell short of the
minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a
qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as the
legal effects of the disqualification of respondent PIATCO's predecessor would come into play
and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of
the project, the Court feels that it is necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it
contains provisions that substantially depart from the draft Concession Agreement included in
the Bid Documents. They maintain that a substantial departure from the draft Concession
Agreement is a violation of public policy and renders the 1997 Concession Agreement null and
void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is
intended to be a draft, i.e., subject to change, alteration or modification, and that this intention
was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said
intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
176
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponent's proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law,
competition requires, not only `bidding upon a common standard, a common basis, upon the
same thing, the same subject matter, the same undertaking,' but also that it be legitimate, fair
and honest; and not designed to injure or defraud the government.31
An essential element of a publicly bidded contract is that all bidders must be on equal footing.
Not simply in terms of application of the procedural rules and regulations imposed by the
relevant government agency, but more importantly, on the contract bidded upon. Each bidder
must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed
to later include or modify certain provisions in the contract awarded such that the contract is
altered in any material respect, then the essence of fair competition in the public bidding is
destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning
bidder may modify the contract and include provisions which are favorable to it that were not
previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The
specifications should, accordingly, operate equally or indiscriminately upon all bidders.32
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a contract
for public work to the lowest responsible bidder, the proposals and specifications therefore
must be so framed as to permit free and full competition. Nor can they enter into a contract
with the best bidder containing substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which the bids were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted
above, the PBAC also clarified that "[s]aid amendments shall only cover items that would not
materially affect the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the contract and would constitute a
denial to the other bidders of the opportunity to bid on the same terms. Hence, the
determination of whether or not a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the contract, when taken as a whole,
would contain substantially different terms and conditions that would have the effect of altering
the technical and/or financial proposals previously submitted by other bidders. The alterations
and modifications in the contract executed between the government and the winning bidder
must be such as to render such executed contract to be an entirely different contract from the
one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through public
bidding, when such subsequent amendment was made without a new public bidding, is null and
void:
The Court agrees with the contention of counsel for the plaintiffs that the due execution of a
contract after public bidding is a limitation upon the right of the contracting parties to alter or
amend it without another public bidding, for otherwise what would a public bidding be good for
if after the execution of a contract after public bidding, the contracting parties may alter or
amend the contract, or even cancel it, at their will? Public biddings are held for the protection
of the public, and to give the public the best possible advantages by means of open competition
between the bidders. He who bids or offers the best terms is awarded the contract subject of
the bid, and it is obvious that such protection and best possible advantages to the public will
disappear if the parties to a contract executed after public bidding may alter or amend it without
another previous public bidding.35
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to
the Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid
Documents and the 1997 Concession Agreement reveals that the documents differ in at least
two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
177
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession Agreement
and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees
which are subject to periodic adjustment of once every two years in accordance with a
prescribed parametric formula and adjustments are made effective only upon written approval
by MIAA; (2) fees other than those included in the first category which maybe adjusted by
PIATCO whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new
fees and charges that may be imposed by PIATCO which have not been previously imposed or
collected at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to
Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between the
draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees
included in each category and the extent of the supervision and regulation which MIAA is
allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval by
MIAA, the draft Concession Agreement includes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon
MIAA approval are classified as "Public Utility Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in the second category identified above. Under the 1997
Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without
need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as "all other
income not classified as Public Utility Revenues derived from operations of the Terminal and the
Terminal Complex."38 Thus, under the 1997 Concession Agreement, ground handling fees,
rentals from airline offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to
regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be
imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only
upon written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees,
aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals
and porterage fees shall be allowed only once every two years and in accordance with the
Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made
effective only after the written express approval of the MIAA. Provided, further, that such
approval of the MIAA, shall be contingent only on the conformity of the adjustments with the
above said parametric formula. The first adjustment shall be made prior to the In-Service Date
of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and
vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of
Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for the
services they cover.39
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
xxx xxx xxx
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-
Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of
services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute
Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire
178
to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP
the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of
such services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to
explain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking
fee is subject to MIAA regulation and approval under the second paragraph of Section 6.03
thereof while porterage fee is covered by the first paragraph of the same provision. There is an
obvious relaxation of the extent of control and regulation by MIAA with respect to the particular
fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been
previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I,
under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate
the same under the same conditions that MIAA may regulate fees under the first category, i.e.,
periodic adjustment of once every two years in accordance with a prescribed parametric
formula and effective only upon written approval by MIAA. However, under the 1997
Concession Agreement, adjustment of fees under the third category is not subject to MIAA
regulation.
With respect to terminal fees that may be charged by PIATCO,41 as shown earlier, this was
included within the category of "Public Utility Revenues" under the 1997 Concession
Agreement. This classification is significant because under the 1997 Concession Agreement,
"Public Utility Revenues" are subject to an "Interim Adjustment" of fees upon the occurrence of
certain extraordinary events specified in the agreement.42 However, under the draft
Concession Agreement, terminal fees are not included in the types of fees that may be subject
to "Interim Adjustment."43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal fees,
are denominated in US Dollars44 while payments to the Government are in Philippine Pesos. In
the draft Concession Agreement, no such stipulation was included. By stipulating that "Public
Utility Revenues" will be paid to PIATCO in US Dollars while payments by PIATCO to the
Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is able
to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated
from the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments that substantially distinguish
the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more favorable terms than what was available
to other bidders at the time the contract was bidded out. It is not very difficult to see that the
changes in the 1997 Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the contract was offered for
bidding. It cannot be denied that under the 1997 Concession Agreement only "Public Utility
Revenues" are subject to MIAA regulation. Adjustments of all other fees imposed and collected
by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the
1997 Concession Agreement, the same is further subject to "Interim Adjustments" not
previously stipulated in the draft Concession Agreement. Finally, the change in the currency
stipulated for "Public Utility Revenues" under the 1997 Concession Agreement, except terminal
fees, gives PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors
who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere in the said contract does
default of PIATCO's loans figure in the agreement. Such default does not directly result in any
concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default has resulted in the acceleration of the payment due date of the Attendant Liability prior
to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform
GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of
the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if
179
qualified, to be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and conditions of this
Agreement; Provided that if at the end of the 180-day period GRP shall not have served the
Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to take over
the operation of the Development Facility. If the concession company should elect to designate
an operator for the Development Facility, the concession company shall in good faith identify
and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from
receipt of GRP's written notice. If the concession company, acting in good faith and with due
diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall
at the end of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses, and further
including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant
Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the Government of the liability for
the loans. Only in one instance may the Government escape the assumption of PIATCO's
liabilities, i.e., when the Government so elects and allows a qualified operator to take over as
Concessionaire. However, this circumstance is dependent on the existence and availability of a
qualified operator who is willing to take over the rights and obligations of PIATCO under the
contract, a circumstance that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section
4.04 of the 1997 Concession Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not made available in the draft
Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession
Agreement because it grants PIATCO a financial advantage or benefit which was not previously
made available during the bidding process. This financial advantage is a significant modification
that translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft
Concession Agreement is subject to amendment because the Bid Documents permit financing
or borrowing. They claim that it was the lenders who proposed the amendments to the draft
Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the
project proponent or the winning bidder to obtain financing for the project, especially in this
case which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would involve a substantial
amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate
sources of funds to support the project. Be that as it may, this Court maintains that amendments
to the contract bidded upon should always conform to the general policy on public bidding if
such procedure is to be faithful to its real nature and purpose. By its very nature and
characteristic, competitive public bidding aims to protect the public interest by giving the public
the best possible advantages through open competition.45 It has been held that the three
principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and
(3) a basis for the exact comparison of bids. A regulation of the matter which excludes any of
these factors destroys the distinctive character of the system and thwarts the purpose of its
adoption.46 These are the basic parameters which every awardee of a contract bidded out must
conform to, requirements of financing and borrowing notwithstanding. Thus, upon a concrete
showing that, as in this case, the contract signed by the government and the contract-awardee
is an entirely different contract from the contract bidded, courts should not hesitate to strike
down said contract in its entirety for violation of public policy on public bidding. A strict
adherence on the principles, rules and regulations on public bidding must be sustained if only
to preserve the integrity and the faith of the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for public service and
for furnishing supplies and other materials. It aims to secure for the government the lowest
possible price under the most favorable terms and conditions, to curtail favoritism in the award
of government contracts and avoid suspicion of anomalies and it places all bidders in equal
footing.47 Any government action which permits any substantial variance between the
conditions under which the bids are invited and the contract executed after the award thereof
is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper
judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were made
on the 1997 Concession Agreement renders the same null and void for being contrary to public
180
policy. These amendments convert the 1997 Concession Agreement to an entirely different
agreement from the contract bidded out or the draft Concession Agreement. It is not difficult to
see that the amendments on (1) the types of fees or charges that are subject to MIAA regulation
or control and the extent thereof and (2) the assumption by the Government, under certain
conditions, of the liabilities of PIATCO directly translates concrete financial advantages to
PIATCO that were previously not available during the bidding process. These amendments
cannot be taken as merely supplements to or implementing provisions of those already existing
in the draft Concession Agreement. The amendments discussed above present new terms and
conditions which provide financial benefit to PIATCO which may have altered the technical and
financial parameters of other bidders had they known that such terms were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement
provides:
Section 4.04 Assignment
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default resulted in the acceleration of the payment due date of the Attendant Liability prior to
its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform
GRP in writing of such default. GRP shall within one hundred eighty (180) days from receipt of
the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if
qualified to be substituted as concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and conditions of this
Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the
Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and designate a
qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRP's
written notice. If the concession company, acting in good faith and with due diligence, is unable
to designate a qualified operator within the aforesaid period, then GRP shall at the end of the
180-day period take over the Development Facility and assume Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses, and further
including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.48
It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults
in its loan obligations, is obligated to pay "all amounts recorded and from time to time
outstanding from the books" of PIATCO which the latter owes to its creditors.49 These amounts
include "all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses."50 This obligation of the Government to pay
PIATCO's creditors upon PIATCO's default would arise if the Government opts to take over NAIA
IPT III. It should be noted, however, that even if the Government chooses the second option,
which is to allow PIATCO's unpaid creditors operate NAIA IPT III, the Government is still at a risk
of being liable to PIATCO's creditors should the latter be unable to designate a qualified operator
within the prescribed period.51 In effect, whatever option the Government chooses to take in
the event of PIATCO's failure to fulfill its loan obligations, the Government is still at a risk of
assuming PIATCO's outstanding loans. This is due to the fact that the Government would only
be free from assuming PIATCO's debts if the unpaid creditors would be able to designate a
qualified operator within the period provided for in the contract. Thus, the Government's
assumption of liability is virtually out of its control. The Government under the circumstances
provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and
willingness of a qualified operator. The above contractual provisions constitute a direct
government guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds to
construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these
projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so
by way of incentives, such as minimizing the unstable flow of returns,52 provided that the
government would not have to unnecessarily expend scarcely available funds for the project
181
itself. As such, direct guarantee, subsidy and equity by the government in these projects are
strictly prohibited.53 This is but logical for if the government would in the end still be at a risk
of paying the debts incurred by the private entity in the BOT projects, then the purpose of the
law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the government or any of its
agencies or local government units assume responsibility for the repayment of debt directly
incurred by the project proponent in implementing the project in case of a loan default.
Clearly by providing that the Government "assumes" the attendant liabilities, which consists of
PIATCO's unpaid debts, the 1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It
is of no moment that the relevant sections are subsumed under the title of "assignment". The
provisions providing for direct government guarantee which is prohibited by law is clear from
the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
xxx xxx xxx
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into
direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which
agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as
may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the
following parameters:
xxx xxx xxx
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the
Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and without
prejudice to any other rights of the Senior Lenders or any Senior Lenders' agent may have
(including without limitation under security interests granted in favor of the Senior Lenders), to
either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y)
below to operate the Development Facility [NAIA Terminal 3] or transfer the Concessionaire's
[PIATCO] rights and obligations under this Agreement to a transferee which is qualified under
sub-clause (viii) below;
xxx xxx xxx
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to
designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior
Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively
in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith to enter into
any other arrangement relating to the Development Facility [NAIA Terminal 3] (other than a
turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one
hundred eighty (180) days. If no agreement relating to the Development Facility [NAIA Terminal
3] is arrived at by GRP and the Senior Lenders within the said 180-day period, then at the end
thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire
[PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire
[PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility
[NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater. Notwithstanding Section
8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of the
Development Facility [NAIA Terminal 3] to GRP pursuant hereto;
xxx xxx xxx
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from
time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders
or any other persons or entities who have provided, loaned, or advanced funds or provided
financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including,
without limitation, all principal, interest, associated fees, charges, reimbursements, and other
related expenses (including the fees, charges and expenses of any agents or trustees of such
persons or entities), whether payable at maturity, by acceleration or otherwise, and further
including amounts owed by Concessionaire [PIATCO] to its professional consultants and
advisers, suppliers, contractors and sub-contractors.54
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill
its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and
enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior
Lenders and the Government are unable to enter into an agreement after the prescribed period,
the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government,
182
termination payment equal to the appraised value of the project or the value of the attendant
liabilities whichever is greater. Attendant liabilities as defined in the ARCA includes all amounts
owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO
has defaulted in its loan obligations but to all other persons who may have loaned, advanced
funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The amount of
PIATCO's debt that the Government would have to pay as a result of PIATCO's default in its loan
obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and
no other agreement relating to NAIA IPT III has been reached between the Government and the
Senior Lenders -- includes, but is not limited to, "all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at maturity, by acceleration
or otherwise."55
It is clear from the foregoing that the ARCA provides for a direct guarantee by the government
to pay PIATCO's loans not only to its Senior Lenders but all other entities who provided PIATCO
funds or services upon PIATCO's default in its loan obligation with its Senior Lenders. The fact
that the Government's obligation to pay PIATCO's lenders for the latter's obligation would only
arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not detract
from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates
the Government to pay any and all amounts owed by PIATCO to its lenders in connection with
NAIA IPT III. Worse, the conditions that would make the Government liable for PIATCO's debts
is triggered by PIATCO's own default of its loan obligations to its Senior Lenders to which loan
contracts the Government was never a party to. The Government was not even given an option
as to what course of action it should take in case PIATCO defaulted in the payment of its senior
loans. The Government, upon PIATCO's default, would be merely notified by the Senior Lenders
of the same and it is the Senior Lenders who are authorized to appoint a qualified nominee or
transferee. Should the Senior Lenders fail to make such an appointment, the Government is then
automatically obligated to "directly deal and negotiate" with the Senior Lenders regarding NAIA
IPT III. The only way the Government would not be liable for PIATCO's debt is for a qualified
nominee or transferee to be appointed in place of PIATCO to continue the construction,
operation and maintenance of NAIA IPT III. This "pre-condition", however, will not take the
contract out of the ambit of a direct guarantee by the government as the existence, availability
and willingness of a qualified nominee or transferee is totally out of the government's control.
As such the Government is virtually at the mercy of PIATCO (that it would not default on its loan
obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified
nominee or transferee or agree to some other arrangement with the Government) and the
existence of a qualified nominee or transferee who is able and willing to take the place of PIATCO
in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy considerations
behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for
all loans, advances and obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its
Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect
would make the Government liable for PIATCO's loans should the conditions as set forth in the
ARCA arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a
BOT project may be accepted, the following conditions must first be met: (1) the project involves
a new concept in technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the government agency or local
government unit has invited by publication other interested parties to a public bidding and
conducted the same.56 The failure to meet any of the above conditions will result in the denial
of the proposal. It is further provided that the presence of direct government guarantee, subsidy
or equity will "necessarily disqualify a proposal from being treated and accepted as an
unsolicited proposal."57 The BOT Law clearly and strictly prohibits direct government
guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a provision to
that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a
proposal can be denied by reason of the existence of direct government guarantee, then its
inclusion in the contract executed after the said proposal has been accepted is likewise sufficient
to invalidate the contract itself. A prohibited provision, the inclusion of which would result in
the denial of a proposal cannot, and should not, be allowed to later on be inserted in the
contract resulting from the said proposal. The basic rules of justice and fair play alone militate
against such an occurrence and must not, therefore, be countenanced particularly in this
instance where the government is exposed to the risk of shouldering hundreds of million of
dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be done
directly cannot be done indirectly.58 To declare the PIATCO contracts valid despite the clear
statutory prohibition against a direct government guarantee would not only make a mockery of
what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring
a monetary obligation resulting from a contract of loan between the project proponent and its
lenders and to which the Government is not a party to -- but would also render the BOT Law
useless for what it seeks to achieve - to make use of the resources of the private sector in the
"financing, operation and maintenance of infrastructure and development projects"59 which
are necessary for national growth and development but which the government, unfortunately,
could ill-afford to finance at this point in time.
IV
Temporary takeover of business affected with public interest
183

Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the State may,
during the emergency and under reasonable terms prescribed by it, temporarily take over or
direct the operation of any privately owned public utility or business affected with public
interest.
The above provision pertains to the right of the State in times of national emergency, and in the
exercise of its police power, to temporarily take over the operation of any business affected with
public interest. In the 1986 Constitutional Commission, the term "national emergency" was
defined to include threat from external aggression, calamities or national disasters, but not
strikes "unless it is of such proportion that would paralyze government service."60 The duration
of the emergency itself is the determining factor as to how long the temporary takeover by the
government would last.61 The temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as there is no transfer of
ownership, whether permanent or temporary. The private entity-owner affected by the
temporary takeover cannot, likewise, claim just compensation for the use of the said business
and its properties as the temporary takeover by the government is in exercise of its police power
and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
. manufacture a particular article, or control the sale of a particular commodity."66 The 1987
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any notice,
notification, or declaration concerning or relating to acquisition, seizure or appropriation by GRP
in times of war or national emergency, GRP shall, by written notice to Concessionaire,
immediately take over the operations of the Terminal and/or the Terminal Complex. During such
take over by GRP, the Concession Period shall be suspended; provided, that upon termination
of war, hostilities or national emergency, the operations shall be returned to Concessionaire, at
which time, the Concession period shall commence to run again. Concessionaire shall be entitled
to reasonable compensation for the duration of the temporary take over by GRP, which
compensation shall take into account the reasonable cost for the use of the Terminal and/or
Terminal Complex, (which is in the amount at least equal to the debt service requirements of
Concessionaire, if the temporary take over should occur at the time when Concessionaire is still
servicing debts owed to project lenders), any loss or damage to the Development Facility, and
other consequential damages. If the parties cannot agree on the reasonable compensation of
Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance
with Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to
Concessionaire shall be offset from the amount next payable by Concessionaire to GRP.62
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on
temporary government takeover and obligate the government to pay "reasonable cost for the
use of the Terminal and/or Terminal Complex."63 Article XII, section 17 of the 1987 Constitution
envisions a situation wherein the exigencies of the times necessitate the government to
"temporarily take over or direct the operation of any privately owned public utility or business
affected with public interest." It is the welfare and interest of the public which is the paramount
consideration in determining whether or not to temporarily take over a particular business.
Clearly, the State in effecting the temporary takeover is exercising its police power. Police power
is the "most essential, insistent, and illimitable of powers."64 Its exercise therefore must not be
unreasonably hampered nor its exercise be a source of obligation by the government in the
absence of damage due to arbitrariness of its exercise.65 Thus, requiring the government to pay
reasonable compensation for the reasonable use of the property pursuant to the operation of
the business contravenes the Constitution.
V
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade,
Constitution strictly regulates monopolies, whether private or public, and even provides for
their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist
to aid the government in carrying on an enterprise or to aid in the performance of various
services and functions in the interest of the public.67 Nonetheless, a determination must first
be made as to whether public interest requires a monopoly. As monopolies are subject to abuses
that can inflict severe prejudice to the public, they are subject to a higher level of State
regulation than an ordinary business undertaking.
184
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the
"exclusive right to operate a commercial international passenger terminal within the Island of
Luzon" at the NAIA IPT III.68 This is with the exception of already existing international airports
in Luzon such as those located in the Subic Bay Freeport Special Economic Zone ("SBFSEZ"), Clark
Special Economic Zone ("CSEZ") and in Laoag City.69 As such, upon commencement of PIATCO's
operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as international
passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as
domestic passenger terminals or in any other manner as it may deem appropriate except those
activities that would compete with NAIA IPT III in the latter's operation as an international
passenger terminal.70 The right granted to PIATCO to exclusively operate NAIA IPT III would be
for a period of twenty-five (25) years from the In-Service Date71 and renewable for another
twenty-five (25) years at the option of the government.72 Both the 1997 Concession Agreement
and the ARCA further provide that, in view of the exclusive right granted to PIATCO, the
concession contracts of the service providers currently servicing Terminals 1 and 2 would no
longer be renewed and those concession contracts whose expiration are subsequent to the In-
Service Date would cease to be effective on the said date.73
The operation of an international passenger airport terminal is no doubt an undertaking imbued
with public interest. In entering into a BuildOperate-and-Transfer contract for the construction,
operation and maintenance of NAIA IPT III, the government has determined that public interest
would be served better if private sector resources were used in its construction and an exclusive
right to operate be granted to the private entity undertaking the said project, in this case
PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and
supervision by the Government through the MIAA, which is the government agency authorized
to operate the NAIA complex, as well as DOTC, the department to which MIAA is attached.74
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must
be regulated.75 While it is the declared policy of the BOT Law to encourage private sector
participation by "providing a climate of minimum government regulations,"76 the same does
not mean that Government must completely surrender its sovereign power to protect public
interest in the operation of a public utility as a monopoly. The operation of said public utility can
not be done in an arbitrary manner to the detriment of the public which it seeks to serve. The
right granted to the public utility may be exclusive but the exercise of the right cannot run riot.
Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III as an international
passenger terminal, the Government, through the MIAA, has the right and the duty to ensure
that it is done in accord with public interest. PIATCO's right to operate NAIA IPT III cannot also
violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
xxx xxx xxx
(e) GRP confirms that certain concession agreements relative to certain services and operations
currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have
a validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that
these services and operations shall not be carried over to the Terminal and the Concessionaire
is under no legal obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation
initiated by any such concessionaire or operator, GRP undertakes and hereby holds
Concessionaire free and harmless on full indemnity basis from and against any loss and/or any
liability resulting from any such litigation, including the cost of litigation and the reasonable fees
paid or payable to Concessionaire's counsel of choice, all such amounts shall be fully deductible
by way of an offset from any amount which the Concessionaire is bound to pay GRP under this
Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-
intervention for G.R. No. 155001 stated that there are two service providers whose contracts
are still existing and whose validity extends beyond the In-Service Date. One contract remains
valid until 2008 and the other until 2010.77
We hold that while the service providers presently operating at NAIA Terminal 1 do not have an
absolute right for the renewal or the extension of their respective contracts, those contracts
whose duration extends beyond NAIA IPT III's In-Service-Date should not be unduly prejudiced.
These contracts must be respected not just by the parties thereto but also by third parties.
PIATCO cannot, by law and certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot
require the Government to break its contractual obligations to the service providers. In contrast
to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v.
Lazaro78 whose contracts consist of temporary hold-over permits, the affected service
providers in the cases at bar, have a valid and binding contract with the Government, through
MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be
violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of
the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its
right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the
primary government agency tasked with the job,79 it is MIAA's responsibility to ensure that
185
whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the G.R. No. 161397 June 30, 2005
law and with due regard to the rights of third parties and above all, the interest of the public.
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
VI vs.
FELIPE P. ARCILLA, JR., Respondent.
CONCLUSION
x - - - - - - - - - - - - - - - - - - - - - - -x
In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the G.R. No. 161426 June 30, 2005
contract for the construction, operation and maintenance of the NAIA IPT III is null and void.
Further, considering that the 1997 Concession Agreement contains material and substantial FELIPE P. ARCILLA, JR., Petitioner,
amendments, which amendments had the effect of converting the 1997 Concession Agreement vs.
into an entirely different agreement from the contract bidded upon, the 1997 Concession DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
Agreement is similarly null and void for being contrary to public policy. The provisions under
Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and DECISION
Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government
guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and CALLEJO, SR., J.:
Regulations are also null and void. The Supplements, being accessory contracts to the ARCA, are
likewise null and void. Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in
October 1981. About five or six months thereafter, he was assigned to the legal department,
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession and thereafter, decided to avail of a loan under the Individual Housing Project (IHP) of the bank.1
Agreement and the Supplements thereto are set aside for being null and void. On September 12, 1983, DBP and Arcilla executed a Deed of Conditional Sale2 over a parcel of
land, as well as the house to be constructed thereon, for the price of 160,000.00. Arcilla
SO ORDERED. borrowed the said amount from DBP for the purchase of the lot and the construction of a
residential building thereon. He obliged himself to pay the loan in 25 years, with a monthly
amortization of 1,417.91, with 9% interest per annum, to be deducted from his monthly
salary.3

DBP obliged itself to transfer the title of the property upon the payment of the loan, including
any increments thereof. It was also agreed therein that if Arcilla availed of optional retirement,
he could elect to continue paying the loan, provided that the loan/amount would be converted
into a regular real estate loan account with the prevailing interest assigned on real estate loans,
payable within the remaining term of the loan account.4

Arcilla was notified of the periodic release of his loan.5 During the period of July 1984 to
December 31, 1986, the monthly amortizations for the said account were deducted from his
monthly salary, for which he was issued receipts.6

The monthly amortization was increased to 1,468.92 in November 1984, and to 1,691.51
beginning January 1985. However, Arcilla opted to resign from the bank in December 1986.

186
Conformably with the Deed of Conditional Sale, the bank informed him, on June 11, 1987, that Penalty charge 8% p.a. if unpaid
the balance of his loan account with the bank had been converted to a regular housing loan, after 30 days from date of advance
thus: i. Interest of the advance at ]
7% p.a. over DBP's ]
Amount converted to PH Loan Interest Rate Remaining Term Monthly borrowing costs; ]-- To be computed from start of 30-day period
Amortization ii. One time 2% service charge ]
155,218.79 - 1 9% 22 yrs. & 6 mos< 1,342.72 iii. Interest on the service charge ]
6,802.45 - 2 9% 21 yrs. & 10 mos. 59.41 iv. 8% penalty charge on the
24,342.91 - 3 9% 22 yrs. 212.07 balances of the advance and
Plus: MRI at PC. 41/thousand 1,614.20 service charge. ]
76.41 ]
186,364.15 Total ]
1,690.617 *Insurance Premiums - 30-day period to be computed from date of advances.
=========
On July 24, 1987, Arcilla signed three Promissory Notes8 for the total amount of 186,364.15. Other Advances - 30-day period to be computed from date of notification.
He was also obliged to pay service charge and interests, as follows:
b. Taxes
a.1 On the amount advanced or balance thereof that remains unpaid for 30 days* or less: b.1 One time service charge2% of the amount advanced
b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
i. Interest on advances at 7% p.a. over DBP's borrowing cost: Penalty charge 8% p.a. if unpaid
ii. No 2% service charge after 30 days from date of advance
iii. No 8% penalty charge However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice
a.2 On the amount advanced or balance thereof that remains unpaid for more than 30 days: to him) the "rate of interest on the loan, as well as all other fees and charges on loans and
advances pursuant to such policy as it may adopt from time to time during the period of the
i. Interest on the advance at 7% p.a. loan; Provided, that the rate of interest on the loan shall be reduced by law or by the Monetary
over DBP's borrowing cost; ] Board; Provided, further, that the adjustment in the rate of interest shall take effect on or after
] the effectivity of the increase or decrease in the maximum rate of interest."10
ii. One time 2% service charge ] -- To be computed from
iii. Interest on the service charge ] the start of the 30-day Upon his request, DBP agreed to grant Arcilla an additional cash advance of 32,000.00.
iv. 8% penalty charge on the balances Thereafter, on May 23, 1984, a Supplement to the Conditional Sale Agreement was executed in
of the advances and service charge.9 ] period which DBP and Arcilla agreed on the following terms of the loan:
Arcilla also agreed to pay to DBP the following:
Amount Interest Rate Per Annum Terms Amortization
*Insurance Premiums - 30-day period to be computed from date of advances 32,000.00 Nine (9%) per cent MRI for P32,000.00 at P0.40/1,000.00 24 years
271.57
Other Advances - 30-day period to be computed from date of notification
12.80
b. Taxes 32,000.00 same to be consolidated with the original advance in accordance with Condition
b.1 One time service charge2% of the amount advanced No. 8 hereof.11 (Est. Amort.)
b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost 284.37

187
=========
The additional advance was, thus, consolidated to the outstanding balance of Arcilla's original
advance, payable within the remaining term thereof at 9% per annum. However, he failed to
pay his loan account, advances, penalty charges and interests which, as of October 31, 1990,
amounted to 241,940.93.12 DBP rescinded the Deed of Conditional Sale by notarial act on
November 27, 1990.13 Nevertheless, it wrote Arcilla, on January 3, 1992, giving him until
October 24, 1992, within which to repurchase the property upon full payment of the current
appraisal or updated total, whichever is lesser; in case of failure to do so, the property would be
advertised for bidding.14 DBP reiterated the said offer on October 7, 1992.15 Arcilla failed to
respond. Consequently, the property was advertised for sale at public bidding on February 14,
1994.16
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on
February 21, 1994. He alleged that DBP failed to furnish him with the disclosure statement
required by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the
execution of the deed of conditional sale and the conversion of his loan account with the bank
into a regular housing loan account. Despite this, DBP immediately deducted the account from
his salary as early as 1984. Moreover, the bank applied its own formula and imposed its usurious
interests, penalties and charges on his loan account and advances. He further alleged, thus:
13. That when plaintiff could no longer cope-up with defendant's illegal and usurious
impositions, the DBP unilaterally increased further the rate of interest, without notice to the
latter, and heaped-up usurious interests, penalties and charges;
---
14. That to further bend the back of the plaintiff, defendant rescinded the subject deed of
conditional sale on 4 December 1990 without giving due notice to plaintiff;
15. That much later, on 10 October 1993, plaintiff received a letter from defendant dated 19
September 1993, informing plaintiff that the subject deed of conditional sale was already
rescinded on 4 December 1990 (xerox copy of the same is hereto attached and made an integral
part hereof as Annex "C";17
In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765
and CB Circular No. 158 because the details required in said statements were particularly
disclosed in the promissory notes, deed of conditional sale and the required notices sent to
Arcilla. In any event, its failure to comply strictly with R.A. No. 3765 did not affect the validity
and enforceability of the subject contracts or transactions. DBP interposed a counterclaim for
the possession of the property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the notarial
rescission of the deeds executed by the parties. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant.1avvphil.zw+ Defendant is hereby directed to furnish the disclosure
statement to the plaintiff within five (5) days upon receipt hereof in the manner and form
provided by R.A. No. 3765 and submit to this Court for approval the total obligation of the
plaintiff as of this date, within ten (10) days from receipt of this order. The Notarial Rescission
(Exh. "16") dated November 27, 1990 is hereby declared null and void. Costs against the
defendant.
SO ORDERED.18
DBP appealed the decision to the Court of Appeals (CA) wherein it made the following
assignment of errors:
4.1. The trial court erred in ruling that the provision of the details of the loan without the
issuance of a "Disclosure Statement" is not compliance with the "Truth in Lending Act;"
4.2. The trial court erred in declaring the Notarial Rescission null and void; and
4.3. The trial court erred in denying DBP's counterclaims for recovery of possession, back rentals
and litigation expenses.19
On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the RTC.
In ordering the dismissal of the complaint, the appellate court ruled that DBP substantially
complied with R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for reconsideration
of the decision. For its part, DBP filed a motion for partial reconsideration of the decision,
praying that Arcilla be ordered to vacate the property. However, the appellate court denied both
motions.
The parties filed separate petitions for review on certiorari with this Court. The first petition,
entitled Development Bank of the Philippines v. Court of Appeals, was docketed as G.R. No.
161397; the second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R.
No. 161426. The Court resolved to consolidate the two cases.
The issues raised in the two petitions are the following: a) whether or not petitioner DBP
complied with the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series of
1978, in the execution of the deed of conditional sale, the supplemental deed of conditional
188
sale, as well as the promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is
mandated to vacate the property and pay rentals for his occupation thereof after the notarial
rescission of the deed of conditional sale was rescinded by notarial act, as well as the
supplement executed by DBP.
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the
creditor bank, was mandated to furnish him with the requisite information in such form
prescribed by the Central Bank before the commutation of the loan transaction. He avers that
the disclosure of the details of the loan contained in the deed of conditional sale and the
supplement thereto, the promissory notes and release sheet, do not constitute substantial
compliance with the law and the CB Circular. He avers that the required disclosure did not
include the following:
[T]he percentage of Finance Charges to Total Amount Financed (Computed in accordance with
Sec. 2(i) of CB Circular 158; the Additional Charges in case certain stipulations in the contract are
not met by the debtor; Total Non-Finance Charges; Total Finance Charges, Effective Interest
Rate, etc. 20
Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765
and CB Circular No. 158 forecloses its right to rescind the transaction between them, and to
demand compliance of his obligation arising from said transaction. Moreover, the bank had no
right to deduct the monthly amortizations from his salary without first complying with the
mandate of R.A. No. 3765.
DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already
contained in the loan transaction documents. It posits that even if it failed to comply strictly
with the disclosure requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law,
the validity and enforceability of any action or transaction is not affected. It asserts that Arcilla
was estopped from invoking R.A. No. 3765 because he failed to demand compliance with R.A.
No. 3765 from the bank before the consummation of the loan transaction, until the time his
complaint was filed with the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering judgment on
its counterclaim for the possession of the subject property, and the liability of Arcilla for rentals
while in the possession of the property after the notarial rescission of the deeds of conditional
sale. For his part, Arcilla (in G.R. No. 161426) insists that the respondent failed to comply with
its obligation under R.A. No. 3765; hence, the notarial rescission of the deed of conditional sale
and the supplement thereof was null and void. Until DBP complies with its obligation, he is not
obliged to comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the
bank, as creditor, is obliged to furnish a client with a clear statement, in writing, setting forth,
to the extent applicable and in accordance with the rules and regulations prescribed by the
Monetary Board of the Central Bank of the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed
as a simple annual rate on the outstanding unpaid balance of the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be
included in the contract covering the credit transaction or any other document to be
acknowledged and signed by the debtor, thus:
The contract covering the credit transaction, or any other document to be acknowledged and
signed by the debtor, shall indicate the above seven items of information. In addition, the
contract or document shall specify additional charges, if any, which will be collected in case
certain stipulations in the contract are not met by the debtor.
Furthermore, the contract or document shall specify additional charges, if any, which will be
collected in case certain stipulations in the contract are not met by the debtor.21
If the borrower is not duly informed of the data required by the law prior to the consummation
of the availment or drawdown, the lender will have no right to collect such charge or increases
thereof, even if stipulated in the promissory note.22 However, such failure shall not affect the
validity or enforceability of any contract or transaction.23
189
In the present case, DBP failed to disclose the requisite information in the disclosure statement
form authorized by the Central Bank, but did so in the loan transaction documents between it
and Arcilla. There is no evidence on record that DBP sought to collect or collected any interest,
penalty or other charges, from Arcilla other than those disclosed in the said
deeds/documents.1avvphi1.zw+
The Court is convinced that Arcilla's claim of not having been furnished the data/information
required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought. Despite the notarial
rescission of the conditional sale in 1990, and DBP's subsequent repeated offers to repurchase
the property, the latter maintained his silence. Arcilla filed his complaint only on February 21,
1994, or four years after the said notarial rescission. The Court finds and so holds that the
following findings and ratiocinations of the CA are correct:
After a careful perusal of the records, We find that the appellee had been sufficiently informed
of the terms and the requisite charges necessarily included in the subject loan. It must be
stressed that the Truth in Lending Act (R.A. No. 3765), was enacted primarily "to protect its
citizens from a lack of awareness of the true cost of credit to the user
understood their implications and effects. Consequently, the trial court's annulment of the
rescission anchored on this ground was unjustified.24
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from
1990, a review of the records has shown that it failed to adduce evidence on the reasonable
amount of rentals for Arcilla's occupancy of the property. Hence, the Court orders a remand of
the case to the court of origin, for the parties to adduce their respective evidence on the bank's
counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for lack of merit.
The petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of Antipolo,
Rizal, Branch 73, for it to resolve the counterclaim of the Development Bank of the Philippines
for possession of the property, and for the reasonable rentals for Felipe P. Arcilla, Jr.'s occupancy
thereof after the notarial rescission of the Deed of Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.

by using a full disclosure of such cost with a view of preventing the uninformed use of credit to SO ORDERED.
the detriment of the national economy" (Emata vs. Intermediate Appellate Court, 174, SCRA 464
[1989]; Sec. 2, R.A. No. 3765). Contrary to appellee's claim that he was not sufficiently informed
of the details of the loan, the records disclose that the required informations were readily
available in the three (3) promissory notes he executed. Precisely, the said promissory notes
were executed to apprise appellee of the remaining balance on his loan when the same was
converted into a regular housing loan. And on its face, the promissory notes signed by no less
than the appellee readily shows all the data required by the Truth in Lending Act (R.A. No. 3765).

Apropos, We agree with the appellant that appellee, a lawyer, would not be so gullible or
negligent as to sign documents without knowing fully well the legal implications and
consequences of his actions, and that appellee was a former employee of appellant. As such
employee, he is as well presumed knowledgeable with matters relating to appellant's business
and fully cognizant of the terms of the loan he applied for, including the charges that had to be
paid.

It might have been different if the borrower was, say, an ordinary employee eager to buy his
first house and is easily lured into accepting onerous terms so long as the same is payable on
installments. In such cases, the Court would be disposed to be stricter in the application of the
Truth in Lending Act, insisting that the borrower be fully informed of what he is entering into.
But in the case at bar, considering appellee's education and training, We must hold, in the light
of the evidence at hand, that he was duly informed of the necessary charges and fully

190
G.R. No. 159912 August 17, 2007 To completely avail themselves of the 2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of 350,000.00:
UNITED COCONUT PLANTERS BANK, Petitioner,
vs. PN # Date of PN Maturity Date Amount Secured
SPOUSES SAMUEL and ODETTE BELUSO, Respondents. 97-00363-1 11 December 1997 28 February 1998 200,000
98-00002-4 2 January 1998 28 February 1998 150,000
DECISION However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
CHICO-NAZARIO, J.: indebtedness was only 2 Million.

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
annul the Court of Appeals Decision1 dated 21 January 2003 and its Resolution2 dated 9 34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of
September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution 763,692.03.
affirmed in turn the Decision3 dated 23 March 2000 and Order4 dated 8 May 2000 of the
Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
interest rate provided in the promissory notes executed by the respondents Spouses Samuel obligations of the spouses Beluso, as follows:
and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
PN # Amount Secured Interest Penalty Total
The procedural and factual antecedents of this case are as follows: 97-00363-1 200,000 31% 36% 225,313.24
97-00366-6 700,000 30.17%
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit (7 days) 32.786%
Agreement whereby the latter could avail from the former credit of up to a maximum amount (102 days) 795,294.72
of 1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other 97-00368-2 1,300,000 28%
than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered (2 days) 30.41%
by Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the (102 days) 1,462,124.54
obligation. The Credit Agreement was subsequently amended to increase the amount of the 98-00002-4 150,000 33%
Promissory Notes Line to a maximum of 2.35 Million pesos and to extend the term thereof to (102 days) 36% 170,034.71
28 February 1998. The spouses Beluso, however, failed to make any payment of the foregoing amounts.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes: On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On
PN # Date of PN Maturity Date Amount Secured 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure
8314-96-00083-3 29 April 1996 27 August 1996 700,000 their credit line, which, by that time, already ballooned to 3,784,603.00.
8314-96-00085-0 2 May 1996 30 August 1996 500,000
8314-96-000292-2 20 November 1996 20 March 1997 800,000 On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
The three promissory notes were renewed several times. On 30 April 1997, the payment of the against UCPB with the RTC of Makati City.
principal and interest of the latter two promissory notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan for 1.3 Million was again released to the spouses On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
Beluso under one promissory note with a due date of 28 February 1998.

191
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB]
void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return
to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso]
the amount of 50,000.00 by way of attorneys fees; and to pay the costs of suit. [The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of 1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,6 prompting UCPB to appeal
the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to
wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not liable for attorneys fees or the costs of suit.7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack
of merit. UCPB thus filed the present petition, submitting the following issues for our resolution:
I FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED
VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND
RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE
AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT
PESOS (1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED
THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED
"INCORRECT COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND
PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE
RESPONDENTS ARE GUILTY OF FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:
(BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK
(LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate
indicative of DBD retail rate or as determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically
fixed, at the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB
contends that said provision must be read with another stipulation in the promissory notes
subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan v. Court of Appeals.11 Furthermore, UCPB argues
that even if the proviso "as determined by the branch head" is considered void, such a
declaration would not ipso facto render the connecting clause "indicative of DBD retail rate"
void in view of the separability clause of the Credit Agreement, which reads:
192

Section 9.08 Separability Clause. If any one or more of the provisions contained in this
AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the remaining provisions
hereof shall not in any way be affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on the
principle of mutuality of contracts, because the spouses Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by petitioner.13 UCPB
also claims that assuming there was any defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing any protest with
respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses
Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,15 where we held:
In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest
rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as
determined by the Branch Head" is indeed dependent solely on the will of petitioner UCPB.
Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB
is given this choice, the rate should be categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of the principle
of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly,
a rate "as determined by the Branch Head" gives the latter unfettered discretion on what the
rate may be. The Branch Head may choose any rate he or she desires. As regards the rate
"indicative of the DBD retail rate," the same cannot be considered as valid for being akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan. The interest rate in Polotan
reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and
Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail rate.
UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it
unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render
the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid.
According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.17
It should be pointed out that the authority to review the interest rate was given UCPB alone as
the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
193
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy.18
The interest rate provisions in the case at bar are illegal not only because of the provisions of
the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate
the Truth in Lending Act. Not disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception which we cannot countenance. It is
against the policy of the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure
of such cost with a view of preventing the uninformed use of credit to the detriment of the
national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the
interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to
itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed
by UCPB, both failed to include in their computation of the outstanding obligation of the spouses
Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also
deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on "Interest
and other Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be
used on the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the
Note as attorneys fee, aside from the expenses and costs of collection whether actually incurred
or not, and a penalty charge of one percent (1%) per month on the total amount due and unpaid
from date of default until fully paid.21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06
of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be
entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the
total amounts due and outstanding exclusive of costs and other expenses.22
Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal
and shall be subject to the same interest rate as herein stipulated.23 and paragraph 3 of the
subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the disputed
computation does not reflect the parties agreement.1avvphi1 The RTC deducted the payment
made by the spouses Beluso amounting to 763,693.00 from the principal of 2,350,000.00.
This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the
parties as to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and
Motion on Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties
agreed that the amount of 763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on "Order of the Application of
Payments," which provides:
194
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in
accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being
no valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose
the mortgaged properties or file a case against the spouses Beluso, attorneys fees were not
warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand.26
The excess amount in such a demand does not nullify the demand itself, which is valid with
respect to the proper amount. A contrary ruling would put commercial transactions in disarray,
as validity of demands would be dependent on the exactness of the computations thereof,
which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized
that said legal interest should be imposed, thus: "There being no valid stipulation as to interest,
the legal rate of interest shall be charged."27 It seems that the RTC inadvertently overlooked its
non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in
both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent
Bank is null and void, only the legal rate of interest which is 12% per annum can be legally
charged and imposed by the bank, which would amount to only about P599,000.00 since 1996
up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the
weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable rate
of interest up to February 28, 1999 on the loan of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay
a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a
12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding
of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses
Beluso in their petition with the RTC. The compounding of interests has furthermore been
declared by this Court to be legal. We have held in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
195
As regards the imposition of penalties, however, although we are likewise upholding the
imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly
excessive interests, the penalty stipulated in the contract may also be reduced by the courts if
it is iniquitous or unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering
the fact that this penalty is already over and above the compounded interest likewise imposed
in the contract. If a 36% interest in itself has been declared unconscionable by this Court,31
what more a 30.41% to 36% penalty, over and above the payment of compounded interest?
UCPB itself must have realized this, as it gave us a sample computation of the spouses Belusos
obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there
had been no demand. Filing a case in court is the judicial demand referred to in Article 116932
of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso
were forced to litigate the issue on the illegality of the interest rate provision of the promissory
notes. The award of attorneys fees, it must be recalled, falls under the sound discretion of the
court.33 Since both parties were forced to litigate to protect their respective rights, and both
are entitled to the award of attorneys fees from the other, practical reasons dictate that we set
off or compensate both parties liabilities for attorneys fees. Therefore, instead of awarding
attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest
of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award
of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated
on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to
exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled
the foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in
the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates
of sale were mooted by the subsequent issuance of new certificates of title in the name of said
bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a
collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree
No. 1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject
to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive
demand on their account, they cannot be said to be in default for refusing to pay the same.
Consequently, according to the spouses Beluso, the "enforcement of such illegal and
overcharged demand through foreclosure of mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already
found that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive,
the spouses Beluso are considered in default with respect to the proper amount of their
obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of
the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in
this case. The grounds for the proper annulment of the foreclosure sale are the following: (1)
that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the
purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price
was inadequate and the inadequacy was so great as to shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of 26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the
following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of 100 or in an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is greater, except that such
196
liability shall not exceed 2,000 on any credit transaction. Action to recover such penalty may
be brought by such person within one year from the date of the occurrence of the violation, in
any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint
did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit
the amended petition [which expressly alleges violation of the Truth in Lending Act] was made
either by [respondents] spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth in
Lending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB
asserts that per the records of the case, the latest of the subject promissory notes had been
executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the
RTC on 9 February 1999, which was after the expiration of the period to file the same on 2
January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals
ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition was made either by [respondents]
spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions
do not deal on an equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender.
We find that its infringement may be inferred or implied from allegations that when
[respondents] spouses Beluso executed the promissory notes, the interest rate chargeable
thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to
[respondents] Spouses Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the
allegation of violation of the Truth in Lending Act can also be inferred from the same allegation
in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory note but was left solely to the
will of the Branch Head of the respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest
rates certainly also means that the promissory notes do not contain a "clear statement in
writing" of "(6) the finance charge expressed in terms of pesos and centavos; and (7) the
percentage that the finance charge bears to the amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation."38 Furthermore, the spouses
Belusos prayer "for such other reliefs just and equitable in the premises" should be deemed to
include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is
100 or an amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability shall not exceed 2,000.00
on any credit transaction.39 As this penalty depends on the finance charge required of the
borrower, the borrowers cause of action would only accrue when such finance charge is
required. In the case at bar, the date of the demand for payment of the finance charge is 2
September 1998, while the foreclosure was made on 28 December 1998. The filing of the case
on 9 February 1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint.40 Pertinent provisions of the
Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of 100 or in an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is the greater, except that such
liability shall not exceed 2,000 on any credit transaction. Action to recover such penalty may
be brought by such person within one year from the date of the occurrence of the violation, in
any court of competent jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and court costs
as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder
shall be fined by not less than 1,000 or more than 5,000 or imprisonment for not less than 6
months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
197
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty
therefor is an amount of 100 or in an amount equal to twice the finance charge required by
the creditor in connection with such transaction, whichever is greater, except that the liability
shall not exceed 2,000.00 on any credit transaction. The action to recover such penalty may be
instituted by the aggrieved private person separately and independently from the criminal case
for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed
under Rule 2, Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the
aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was
not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due
process mandates that a defendant should be sufficiently apprised of the matters he or she
would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed
by the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not
informing the borrower in writing before the execution of the Promissory Notes of the interest
rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay
petitioners double the amount the bank is charging petitioners by way of sanction for its
violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of
the assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly
hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests
in the promissory notes void, and (2) the action to declare the foreclosure void. There had been
no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the
above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since
the former is merely a preparatory contract to the contract of loan or mutuum. Under such
credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the
other party amounts not exceeding the limit provided. The credit transaction thus occurred not
when the credit line was opened, but rather when the credit line was availed of. In the case at
bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed
the Credit Agreement, where no interest rate was mentioned, but when the parties executed
the promissory notes, where the allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
198
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true
cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate
the true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso
after execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied
to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City)
on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before
the RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case
No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it poses
issues which are similar to those of the present case.43 To prove its point, UCPB cited the
spouses Belusos Amended Petition in Civil Case No. V-7227, which contains similar allegations
as those in the present case. The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-
314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is
raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before
the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that
Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the
restraining order, UCPB proceeded with the foreclosure and auction sale. As the act sought to
be restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had
to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the
RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved
in the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before
the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided
for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss
based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action
or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1,
not in paragraphs (f), (h) and (i):
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SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived,
abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with.44 (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same action, but should take
care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile
absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the
time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will
still not change our findings. It is indeed the general rule that in cases where there are two
pending actions between the same parties on the same issue, it should be the later case that
should be dismissed. However, this rule is not absolute. According to this Court in Allied Banking
Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later
action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal
of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed
if the later action is the more appropriate vehicle for the ventilation of the issues between the
parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was
filed merely to preempt the later action or to anticipate its filing and lay the basis for its
dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction
against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC
of Makati City includes an action for the annulment of said foreclosure, an action certainly more
proper in view of the execution of the foreclosure sale. The former case was improperly filed in
Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated
by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more
appropriate vehicle for litigating the issues between the parties, as compared to Civil Case No.
V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case
No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1. In addition to the sum of 2,350,000.00 as determined by the courts a quo, respondent
spouses Samuel and Odette Beluso are also liable for the following amounts:
200
a. Penalty of 12% per annum on the amount due46 from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due47 from date of demand;

2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
Beluso:

a. Payments made by the spouses in the amount of 763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of 26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the
Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.

SO ORDERED.

201
IV.Other Bank
Functions

Richelle Ann Zamora

202
 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 on certiorari 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
203
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."
204
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:
205

"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
as depositories 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 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 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 Agro-lndustrial 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
206
liability for damage, loss or destruction of the contents of the safety deposit box which may arise expected of a good father of a family, thereby becoming a party to the aggravation of the injury
from its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot take refuge or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent
under the said conditions. Article 1170 of the Civil Code, which reads:

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
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.

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 this ponencia. 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

207

G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED
and SECURITY BANK CORPORATION, respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter of
credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901
entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January
2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC)
entered into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the
Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design, construction, commissioning, testing and completion
of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1
June 2000, or such later date as may be agreed upon between petitioner and respondent LHC
or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled
to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which
are variations, force majeure, and delays caused by LHC itself.5 Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other
means enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion date, or
such time for completion as may be determined by the parties' agreement, petitioner opened
in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred
to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch
of respondent Australia and New Zealand Banking Group Limited (ANZ Bank)7 and Standby
Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)8 each in the
amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of
legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another Request
for Arbitration, this time filed by petitioner before the International Chamber of Commerce
(ICC)11 on 3 November 2000. In both arbitration proceedings, the common issues presented
were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to
justify the extension of time sought by petitioner; and [2) whether LHC had the right to
terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract,12 petitionerin two separate letters13 both dated 10
August 2000advised respondent banks of the arbitration proceedings already pending before
the CIAC and ICC in connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution of disputes before
the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or
disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it
to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to
Clause 8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks informed petitioner that they
would pay on the Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted; accordingly it declared
petitioner in default/delay in the performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28
June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the securities for the payment
of liquidated damages for the delay.16
208
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
temporary restraining order and writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati.17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from transferring, paying
on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on the same day. The case was
docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending
the temporary restraining order for a period of seventeen (17) days or until 26 November
2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable
injury to justify the issuance of the writ. Employing the principle of "independent contract" in
letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the principle of "independent
contract" could be invoked only by respondent banks since according to it respondent LHC is the
ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere
custodians of the funds and as such they were obligated to transfer the same to the beneficiary
for as long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65,
with prayer for the issuance of a temporary restraining order and writ of preliminary
injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by the
CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no
right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on
and use of the Securities as payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so
certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining
order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and
ordering respondent banks to cease and desist from transferring, paying or in any manner
disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial court's decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate court held that
even assuming that the trial court's denial of petitioner's application for a writ of preliminary
injunction was erroneous, it constituted only an error of judgment which is not correctible by
certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE
UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED
TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.21
209
Petitioner contends that the courts below improperly relied on the "independence principle" on
letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC
deliberately misrepresented the supposed existence of delay despite its knowledge that the
issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant
to the principle against unjust enrichment and that, under the premises, injunction was the
appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a number
of documentary and testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing of the petition facts
and admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its knowledge and admission that delays were
excused under the Turnkey Contractto be able to draw against the Securities. Reiterating that
fraud constitutes an exception to the independence principle, petitioner urges that this warrants
a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law
and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would
be allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings
filed by petitioner present erroneous and misleading information which would change
petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004,
the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the
Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation
dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision
of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the
issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of
credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1)
ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation,"
in which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-
332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the
RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum,
LHC stresses that the question of whether the funds it drew on the subject letters of credit
should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to
enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No.
04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at
the same time seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC
argues that it was under no obligation to look into the validity or accuracy of the certification
submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds
that the act sought to be enjoined by petitioner was already fait accompli and the present
petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of
the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying contract. Since the bank's
customer cannot draw on the letter, it does not function as an assignment by the customer to
the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it
entails a primary liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable.29
210
In commercial transactions, a letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.30 The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract
for the sale of goods. However, credits are also used in non-sale settings where they serve to
reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be
known as standby credits.31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed
the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee.33 A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying
contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international trade transactions, the
ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP.35 First published in 1933, the UCP for Documentary
Credits has undergone several revisions, the latest of which was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in
the absence of any particular provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. More recently, in Bank of America, NT
& SA v. Court of Appeals,38 this Court ruled that there being no specific provisions which govern
the legal complexities arising from transactions involving letters of credit, not only between or
among banks themselves but also between banks and the seller or the buyer, as the case may
be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with
or bound by such contract(s), even if any reference whatsoever to such contract(s) is included
in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses
by the applicant resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships existing between the
banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or any other
person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit,
LHC asserts it is entitled to invoke the principle.
211
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied with.41 Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that
may invoke the independence principle on letters of creditdoes not impress this Court. To say
that the independence principle may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are used in commercial transactions. As it
is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not
for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other hand, the other
party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured
of being empowered to call on the letter of credit as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down
a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under a letter of credit. In
other words, the argument is incompatible with the very nature of the letter of credit. If a letter
of credit is drawable only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial use for letters of credit
in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that
commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often
they replace surety contracts, which tend to generate higher costs than credits do and are
usually triggered by a factual determination rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on
the one hand and the standby credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share a common purpose. Both
ensure against the obligor's nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's
performance, usually by hiring someone to complete that performance. Surety contracts, then,
often involve costs of determining whether the obligor defaulted (a matter over which the
surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety
contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is
a strong financial institution that will perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes lengthy and costly determination
that the obligor has defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash
in the event of nonperformance, that he will receive it promptly, and that he will receive it
before any litigation with the obligor (the applicant) over the nature of the applicant's
performance takes place. The standby credit has this opposite effect of the surety contract: it
reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligor's performance. The beneficiary may have to establish that fact
in litigation. During the litigation, the surety holds the money and the beneficiary bears most of
the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives
his money promptly upon presentation of the required documents. It may be that the applicant
has, in fact, performed and that the beneficiary's presentation of those documents is not
rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of
warranty; but, during the litigation to determine whether the applicant has in fact breached the
obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should understand this allocation of burdens.
There is a tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.42
212
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to
ask the bank to honor the credit by allowing him to draw thereon. The situation itself
emasculates petitioner's posture that LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of
credit, this Court rules that the respondent banks were left with little or no alternative but to
honor the credit and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor
at its cost shall on the Commencement Date provide security to the Employer in the form of two
irrevocable and confirmed standby letters of credit (the "Securities"), each in the amount of
US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the
Employer. Each of the Securities must be in form and substance acceptable to the Employer and
may be provided on an annually renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer
by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for
each and every day or part of a day that shall elapse between the Target Completion Date and
the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor
shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay on the following day without need of demand from
the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount
of such damages from any monies due, or to become due to the Contractor and/or by drawing
on the Security."45
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law.46 A careful perusal of the Turnkey Contract reveals the
intention of the parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the
happening of the contingency for which the Securities have been proffered. Thus, even without
the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right
to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities
is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a
breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral
tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to the confirming bank, documents that contain,
expressly or by implication, material representations of fact that to his knowledge are untrue.
In such a situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principle's purpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals.
To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default
such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment.48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:
(a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously
damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date.
213
It argued that if its claims for extension would be found meritorious by the ICC, then LHC would
not be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive right or
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main
suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to
secure the rights of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be exercised based
upon the grounds and in the manner provided by law.51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to
be directed are violative of the said right.52 It must be shown that the invasion of the right
sought to be protected is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ to prevent
serious damage.53 Moreover, an injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain
LHC's call on the Securities which would justify the issuance of preliminary injunction. By
petitioner's own admission, the right of LHC to call on the Securities was contractually rooted
and subject to the express stipulations in the Turnkey Contract.55 Indeed, the Turnkey Contract
is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in
case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the
Securities, stating the nature of the default for which the claim on any of the Securities is to be
made, provided that no notice will be required if the Employer calls upon any of the Securities
for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or
extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount
of such damages from any monies due, or to become due, to the Contractor and/or by drawing
on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would indicate
that the parties intended that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It is therefore premature
and absurd to conclude that the draws on the Securities were outright fraudulent given the fact
that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court,
did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
injunction.58 What petitioner did assert before the courts below was the fact that LHC's draws
on the Securities would be premature and without basis in view of the pending disputes
between them. Petitioner should not be allowed in this instance to bring into play the fraud
exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or
arguments not brought out in the proceedings below will ordinarily not be considered by a
reviewing court as they cannot be raised for the first time on appeal.59 The lower courts could
thus not be faulted for not applying the fraud exception rule not only because the existence of
fraud was fundamentally interwoven with the issue of default still pending before the arbitral
tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the
courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable
right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before
the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the
Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights
in accordance with the tenor thereof. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.60 More
importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the
Civil Code,61 petitioner could have incorporated in its Contract with LHC, a proviso that only the
final determination by the arbitral tribunals that default had occurred would justify the
enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would
have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence
principle the banks were under no obligation to determine the veracity of LHC's certification
that default has occurred. Neither were they bound by petitioner's declaration that LHC's call
thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the
required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's
draws upon the Securities were wrongful due to the non-existence of the fact of default, its right
to seek indemnification for damages it suffered would not normally be foreclosed pursuant to
general principles of law.
214
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject
letters of credit had been fully drawn. This fact alone would have been sufficient reason to
dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have
already become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post
Manila, Inc.64 this Court ruled that where the period within which the former employees were
prohibited from engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any declaration
upholding the propriety of the writ would be entirely useless as there would be no actual case
or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition mootfor any declaration by this Court as to propriety or impropriety of the
non-issuance of injunctive relief could have no practical effect on the existing controversy.65
The other issues raised by petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate
proceeding.
against forum-shopping, the test applied is whether the elements of litis pendentia are present
or whether a final judgment in one case will amount to res judicata in another.69 Forum-
shopping constitutes improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions
for its violation, the Court will refrain from making any definitive ruling on this issue until after
petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.
SO ORDERED.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner
presented before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of
Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for
Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332
wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the
Securities should be returnedpetitioner resorted to forum-shopping. In both instances,
however, petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded on
the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another forum
other than by appeal or special civil action of certiorari, or the institution of two or more actions
or proceedings grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.68 To determine whether a party violated the rule

215
V. Banks in Distress

Richelle Ann Zamora

216
 G.R. No. 168332 June 19, 2009
ANA MARIA A. KORUGA, Petitioner,
vs.
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR S. PAGUIO, FRANCISCO A. RIVERA,
and THE HONORABLE COURT OF APPEALS, THIRD DIVISION, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 169053 June 19, 2009
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR S. PAGUIO, and FRANCISCO A.
RIVERA, Petitioners,
vs.
HON. SIXTO MARELLA, JR., Presiding Judge, Branch 138, Regional Trial Court of Makati City,
and ANA MARIA A. KORUGA, Respondents.
DECISION
NACHURA, J.:
Before this Court are two petitions that originated from a Complaint filed by Ana Maria A. Koruga
(Koruga) before the Regional Trial Court (RTC) of Makati City against the Board of Directors of
Banco Filipino and the Members of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP)
for violation of the Corporation Code, for inspection of records of a corporation by a stockholder,
for receivership, and for the creation of a management committee.
G.R. No. 168332
The first is a Petition for Certiorari under Rule 65 of the Rules of Court, docketed as G.R. No.
168332, praying for the annulment of the Court of Appeals (CA) Resolution1 in CA-G.R. SP No.
88422 dated April 18, 2005 granting the prayer for a Writ of Preliminary Injunction of therein
petitioners Teodoro O. Arcenas, Jr., Albert C. Aguirre, Cesar S. Paguio, and Francisco A. Rivera
(Arcenas, et al.).
Koruga is a minority stockholder of Banco Filipino Savings and Mortgage Bank. On August 20,
2003, she filed a complaint before the Makati RTC which was raffled to Branch 138, presided
over by Judge Sixto Marella, Jr.2 Korugas complaint alleged:
10. 1 Violation of Sections 31 to 34 of the Corporation Code ("Code") which prohibit self-dealing
and conflicts of interest of directors and officers, thus:
(a) For engaging in unsafe, unsound, and fraudulent banking practices that have jeopardized the
welfare of the Bank, its shareholders, who includes among others, the Petitioner, and
depositors. (sic)
(b) For granting and approving loans and/or "loaned" sums of money to six (6) "dummy"
borrower corporations ("Borrower Corporations") which, at the time of loan approval, had no
financial capacity to justify the loans. (sic)
(c) For approving and accepting a dacion en pago, or payment of loans with property instead of
cash, resulting to a diminished future cumulative interest income by the Bank and a decline in
its liquidity position. (sic)
(d) For knowingly giving "favorable treatment" to the Borrower Corporations in which some or
most of them have interests, i.e. interlocking directors/officers thereof, interlocking ownerships.
(sic)
(e) For employing their respective offices and functions as the Banks officers and directors, or
omitting to perform their functions and duties, with negligence, unfaithfulness or abuse of
confidence of fiduciary duty, misappropriated or misapplied or ratified by inaction the
misappropriation or misappropriations, of (sic) almost 1.6 Billion Pesos (sic) constituting the
Banks funds placed under their trust and administration, by unlawfully releasing loans to the
Borrower Corporations or refusing or failing to impugn these, knowing before the loans were
released or thereafter that the Banks cash resources would be dissipated thereby, to the
prejudice of the Petitioner, other Banco Filipino depositors, and the public.
10.2 Right of a stockholder to inspect the records of a corporation (including financial
statements) under Sections 74 and 75 of the Code, as implemented by the Interim Rules;
(a) Unlawful refusal to allow the Petitioner from inspecting or otherwise accessing the corporate
records of the bank despite repeated demand in writing, where she is a stockholder. (sic)
10.3 Receivership and Creation of a Management Committee pursuant to:
(a) Rule 59 of the 1997 Rules of Civil Procedure ("Rules");
(b) Section 5.2 of R.A. No. 8799;
217
(c) Rule 1, Section 1(a)(1) of the Interim Rules;
(d) Rule 1, Section 1(a)(2) of the Interim Rules;
(e) Rule 7 of the Interim Rules;
(f) Rule 9 of the Interim Rules; and
(g) The General Banking Law of 2000 and the New Central Bank Act.3
On September 12, 2003, Arcenas, et al. filed their Answer raising, among others, the trial courts
lack of jurisdiction to take cognizance of the case. They also filed a Manifestation and Motion
seeking the dismissal of the case on the following grounds: (a) lack of jurisdiction over the
subject matter; (b) lack of jurisdiction over the persons of the defendants; (c) forum-shopping;
and (d) for being a nuisance/harassment suit. They then moved that the trial court rule on their
affirmative defenses, dismiss the intra-corporate case, and set the case for preliminary hearing.
In an Order dated October 18, 2004, the trial court denied the Manifestation and Motion, ruling
thus:
The result of the procedure sought by defendants Arcenas, et al. (sic) is for the Court to conduct
a preliminary hearing on the affirmative defenses raised by them in their Answer. This [is]
proscribed by the Interim Rules of Procedure on Intracorporate (sic) Controversies because
when a preliminary hearing is conducted it is "as if a Motion to Dismiss was filed" (Rule 16,
Section 6, 1997 Rules of Civil Procedure). A Motion to Dismiss is a prohibited pleading under the
Interim Rules, for which reason, no favorable consideration can be given to the Manifestation
and Motion of defendants, Arcenas, et al.
The Court finds no merit to (sic) the claim that the instant case is a nuisance or harassment suit.
WHEREFORE, the Court defers resolution of the affirmative defenses raised by the defendants
Arcenas, et al.4
Arcenas, et al. moved for reconsideration5 but, on January 18, 2005, the RTC denied the
motion.6 This prompted Arcenas, et al. to file before the CA a Petition for Certiorari and
Prohibition under Rule 65 of the Rules of Court with a prayer for the issuance of a writ of
preliminary injunction and a temporary retraining order (TRO).7
On February 9, 2005, the CA issued a 60-day TRO enjoining Judge Marella from conducting
further proceedings in the case.8
On February 22, 2005, the RTC issued a Notice of Pre-trial9 setting the case for pre-trial on June
2 and 9, 2005. Arcenas, et al. filed a Manifestation and Motion10 before the CA, reiterating their
application for a writ of preliminary injunction. Thus, on April 18, 2005, the CA issued the
assailed Resolution, which reads in part:
(C)onsidering that the Temporary Restraining Order issued by this Court on February 9, 2005
expired on April 10, 2005, it is necessary that a writ of preliminary injunction be issued in order
not to render ineffectual whatever final resolution this Court may render in this case, after the
petitioners shall have posted a bond in the amount of FIVE HUNDRED THOUSAND (500,000.00)
PESOS.
SO ORDERED.11
Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of the Rules of Court. Koruga
alleged that the CA effectively gave due course to Arcenas, et al.s petition when it issued a writ
of preliminary injunction without factual or legal basis, either in the April 18, 2005 Resolution
itself or in the records of the case. She prayed that this Court restrain the CA from implementing
the writ of preliminary injunction and, after due proceedings, make the injunction against the
assailed CA Resolution permanent.12
In their Comment, Arcenas, et al. raised several procedural and substantive issues. They alleged
that the Verification and Certification against Forum-Shopping attached to the Petition was not
executed in the manner prescribed by Philippine law since, as admitted by Korugas counsel
himself, the same was only a facsimile.
They also averred that Koruga had admitted in the Petition that she never asked for
reconsideration of the CAs April 18, 2005 Resolution, contending that the Petition did not raise
pure questions of law as to constitute an exception to the requirement of filing a Motion for
Reconsideration before a Petition for Certiorari is filed.
They, likewise, alleged that the Petition may have already been rendered moot and academic
by the July 20, 2005 CA Decision,13 which denied their Petition, and held that the RTC did not
commit grave abuse of discretion in issuing the assailed orders, and thus ordered the RTC to
proceed with the trial of the case.
Meanwhile, on March 13, 2006, this Court issued a Resolution granting the prayer for a TRO and
enjoining the Presiding Judge of Makati RTC, Branch 138, from proceeding with the hearing of
the case upon the filing by Arcenas, et al. of a 50,000.00 bond. Koruga filed a motion to lift the
TRO, which this Court denied on July 5, 2006.
218

On the other hand, respondents Dr. Conrado P. Banzon and Gen. Ramon Montao also filed
their Comment on Korugas Petition, raising substantially the same arguments as Arcenas, et al.
G.R. No. 169053
G.R. No. 169053 is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, with
prayer for the issuance of a TRO and a writ of preliminary injunction filed by Arcenas, et al.
In their Petition, Arcenas, et al. asked the Court to set aside the Decision14 dated July 20, 2005
of the CA in CA-G.R. SP No. 88422, which denied their petition, having found no grave abuse of
discretion on the part of the Makati RTC. The CA said that the RTC Orders were interlocutory in
nature and, thus, may be assailed by certiorari or prohibition only when it is shown that the
court acted without or in excess of jurisdiction or with grave abuse of discretion. It added that
the Supreme Court frowns upon resort to remedial measures against interlocutory orders.
Arcenas, et al. anchored their prayer on the following grounds: that, in their Answer before the
RTC, they had raised the issue of failure of the court to acquire jurisdiction over them due to
improper service of summons; that the Koruga action is a nuisance or harassment suit; that
there is another case involving the same parties for the same cause pending before the
Monetary Board of the BSP, and this constituted forum-shopping; and that jurisdiction over the
subject matter of the case is vested by law in the BSP.15
Arcenas, et al. assign the following errors:
I. THE COURT OF APPEALS, IN "FINDING NO GRAVE ABUSE OF DISCRETION COMMITTED BY
PUBLIC RESPONDENT REGIONAL TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE
ASSAILED ORDERS," FAILED TO CONSIDER AND MERELY GLOSSED OVER THE MORE
TRANSCENDENT ISSUES OF THE LACK OF JURISDICTION ON THE PART OF SAID PUBLIC
RESPONDENT OVER THE SUBJECT MATTER OF THE CASE BEFORE IT, LITIS PENDENTIA AND
FORUM SHOPPING, AND THE CASE BELOW BEING A NUISANCE OR HARASSMENT SUIT, EITHER
ONE AND ALL OF WHICH GOES/GO TO RENDER THE ISSUANCE BY PUBLIC RESPONDENT OF THE
ASSAILED ORDERS A GRAVE ABUSE OF DISCRETION.
II. THE FINDING OF THE COURT OF APPEALS OF "NO GRAVE ABUSE OF DISCRETION COMMITTED
BY PUBLIC RESPONDENT REGIONAL TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE
ASSAILED ORDERS," IS NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT.16
Meanwhile, in a Manifestation and Motion filed on August 31, 2005, Koruga prayed for, among
others, the consolidation of her Petition with the Petition for Review on Certiorari under Rule
45 filed by Arcenas, et al., docketed as G.R. No. 169053. The motion was granted by this Court
in a Resolution dated September 26, 2005.
Our Ruling
Initially, we will discuss the procedural issue.
Arcenas, et al. argue that Korugas petition should be dismissed for its defective Verification and
Certification Against Forum-Shopping, since only a facsimile of the same was attached to the
Petition. They also claim that the Verification and Certification Against Forum-Shopping,
allegedly executed in Seattle, Washington, was not authenticated in the manner prescribed by
Philippine law and not certified by the Philippine Consulate in the United States.
This contention deserves scant consideration.
On the last page of the Petition in G.R. No. 168332, Korugas counsel executed an Undertaking,
which reads as follows:
In view of that fact that the Petitioner is currently in the United States, undersigned counsel is
attaching a facsimile copy of the Verification and Certification Against Forum-Shopping duly
signed by the Petitioner and notarized by Stephanie N. Goggin, a Notary Public for the Sate (sic)
of Washington. Upon arrival of the original copy of the Verification and Certification as certified
by the Office of the Philippine Consul, the undersigned counsel shall immediately provide
duplicate copies thereof to the Honorable Court.17
Thus, in a Compliance18 filed with the Court on September 5, 2005, petitioner submitted the
original copy of the duly notarized and authenticated Verification and Certification Against
Forum-Shopping she had executed.19 This Court noted and considered the Compliance
satisfactory in its Resolution dated November 16, 2005. There is, therefore, no need to further
belabor this issue.
We now discuss the substantive issues in this case.
First, we resolve the prayer to nullify the CAs April 18, 2005 Resolution.
We hold that the Petition in G.R. No. 168332 has become moot and academic. The writ of
preliminary injunction being questioned had effectively been dissolved by the CAs July 20, 2005
Decision. The dispositive portion of the Decision reads in part:
219

The case is REMANDED to the court a quo for further proceedings and to resolve with deliberate
dispatch the intra-corporate controversies and determine whether there was actually a valid
service of summons. If, after hearing, such service is found to have been improper, then new
summons should be served forthwith.20
Accordingly, there is no necessity to restrain the implementation of the writ of preliminary
injunction issued by the CA on April 18, 2005, since it no longer exists.
However, this Court finds that the CA erred in upholding the jurisdiction of, and remanding the
case to, the RTC.
The resolution of these petitions rests mainly on the determination of one fundamental issue:
Which body has jurisdiction over the Koruga Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with violation of Sections 31 to 34 of the Corporation
Code, prohibiting self-dealing and conflict of interest of directors and officers; invoked her right
to inspect the corporations records under Sections 74 and 75 of the Corporation Code; and
prayed for Receivership and Creation of a Management Committee, pursuant to Rule 59 of the
Rules of Civil Procedure, the Securities Regulation Code, the Interim Rules of Procedure
Governing Intra-Corporate Controversies, the General Banking Law of 2000, and the New
Central Bank Act. She accused the directors and officers of Banco Filipino of engaging in unsafe,
unsound, and fraudulent banking practices, more particularly, acts that violate the prohibition
on self-dealing.
It is clear that the acts complained of pertain to the conduct of Banco Filipinos banking business.
A bank, as defined in the General Banking Law,21 refers to an entity engaged in the lending of
funds obtained in the form of deposits.22 The banking business is properly subject to reasonable
regulation under the police power of the state because of its nature and relation to the fiscal
affairs of the people and the revenues of the state. Banks are affected with public interest
because they receive funds from the general public in the form of deposits. It is the
Governments responsibility to see to it that the financial interests of those who deal with banks
and banking institutions, as depositors or otherwise, are protected. In this country, that task is
delegated to the BSP, which pursuant to its Charter, is authorized to administer the monetary,
banking, and credit system of the Philippines. It is further authorized to take the necessary steps
against any banking institution if its continued operation would cause prejudice to its depositors,
creditors and the general public as well.23
The law vests in the BSP the supervision over operations and activities of banks. The New Central
Bank Act provides:
Section 25. Supervision and Examination. - The Bangko Sentral shall have supervision over, and
conduct periodic or special examinations of, banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied activities.24
Specifically, the BSPs supervisory and regulatory powers include:
4.1 The issuance of rules of conduct or the establishment of standards of operation for uniform
application to all institutions or functions covered, taking into consideration the distinctive
character of the operations of institutions and the substantive similarities of specific functions
to which such rules, modes or standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
4.3 Overseeing to ascertain that laws and Regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the last date of
examination to determine whether an institution is conducting its business on a safe or sound
basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be
immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action.25
Koruga alleges that "the dispute in the trial court involves the manner with which the Directors
(sic) have handled the Banks affairs, specifically the fraudulent loans and dacion en pago
authorized by the Directors in favor of several dummy corporations known to have close ties
and are indirectly controlled by the Directors."26 Her allegations, then, call for the examination
of the allegedly questionable loans. Whether these loans are covered by the prohibition on self-
dealing is a matter for the BSP to determine. These are not ordinary intra-corporate matters;
rather, they involve banking activities which are, by law, regulated and supervised by the BSP.
As the Court has previously held:
220
It is well-settled in both law and jurisprudence that the Central Monetary Authority, through the
Monetary Board, is vested with exclusive authority to assess, evaluate and determine the
condition of any bank, and finding such condition to be one of insolvency, or that its continuance
in business would involve a probable loss to its depositors or creditors, forbid bank or non-bank
financial institution to do business in the Philippines; and shall designate an official of the BSP
or other competent person as receiver to immediately take charge of its assets and liabilities.27
Correlatively, the General Banking Law of 2000 specifically deals with loans contracted by bank
directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related
Interests. No director or officer of any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall he become a guarantor,
indorser or surety for loans from such bank to others, or in any manner be an obligor or incur
any contractual liability to the bank except with the written approval of the majority of all the
directors of the bank, excluding the director concerned: Provided, That such written approval
shall not be required for loans, other credit accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be
entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to
the appropriate supervising and examining department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or stockholders and their related interests
shall be upon terms not less favorable to the bank than those offered to others.
After due notice to the board of directors of the bank, the office of any bank director or officer
who violates the provisions of this Section may be declared vacant and the director or officer
shall be subject to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations and guarantees
that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and
their related interests, as well as investments of such bank in enterprises owned or controlled
by said directors, officers, stockholders and their related interests. However, the outstanding
loans, credit accommodations and guarantees which a bank may extend to each of its
stockholders, directors, or officers and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and
guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded
from such limit: Provided, further, That loans, credit accommodations and advances to officers
in the form of fringe benefits granted in accordance with rules as may be prescribed by the
Monetary Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related interests."
The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to
loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.28
Furthermore, the authority to determine whether a bank is conducting business in an unsafe or
unsound manner is also vested in the Monetary Board. The General Banking Law of 2000
provides:
SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In determining whether
a particular act or omission, which is not otherwise prohibited by any law, rule or regulation
affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an
unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any
of the following circumstances:
56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk
or danger to the safety, stability, liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material loss or damage or abnormal risk
to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to
the public in general;
56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits,
advantage or preference to the bank or any party in the discharge by the director or officer of
his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable
negligence; or
56.4. The act or omission involves entering into any contract or transaction manifestly and
grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or
officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or
unsound manner, the Monetary Board may, without prejudice to the administrative sanctions
provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same
Act and/or immediately exclude the erring bank from clearing, the provisions of law to the
contrary notwithstanding.
221
Finally, the New Central Bank Act grants the Monetary Board the power to impose
administrative sanctions on the erring bank:
Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the
criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act,
the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their directors
and/or officers, for any willful violation of its charter or by-laws, willful delay in the submission
of reports or publications thereof as required by law, rules and regulations; any refusal to permit
examination into the affairs of the institution; any willful making of a false or misleading
statement to the Board or the appropriate supervising and examining department or its
examiners; any willful failure or refusal to comply with, or violation of, any banking law or any
order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling
by the Governor; or any commission of irregularities, and/or conducting business in an unsafe
or unsound manner as may be determined by the Monetary Board, the following administrative
sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no
case to exceed Thirty thousand pesos (30,000) a day for each violation, taking into
consideration the attendant circumstances, such as the nature and gravity of the violation or
irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange operations or authority to accept new deposits or
make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively suspend any
director or officer of a bank or quasi-bank pending an investigation: Provided, That should the
case be not finally decided by the Bangko Sentral within a period of one hundred twenty (120)
days after the date of suspension, said director or officer shall be reinstated in his position:
Provided, further, That when the delay in the disposition of the case is due to the fault,
negligence or petition of the director or officer, the period of delay shall not be counted in
computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.
Whether or not there is an administrative proceeding, if the institution and/or the directors
and/or officers concerned continue with or otherwise persist in the commission of the indicated
practice or violation, the Monetary Board may issue an order requiring the institution and/or
the directors and/or officers concerned to cease and desist from the indicated practice or
violation, and may further order that immediate action be taken to correct the conditions
resulting from such practice or violation. The cease and desist order shall be immediately
effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing before the
Monetary Board or any committee chaired by any Monetary Board member created for the
purpose, upon request made by the respondents within five (5) days from their receipt of the
order. If no such hearing is requested within said period, the order shall be final. If a hearing is
conducted, all issues shall be determined on the basis of records, after which the Monetary
Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for
any failure to comply with the requirements of law, Monetary Board regulations and policies,
and/or instructions issued by the Monetary Board or by the Governor, fines not in excess of Ten
thousand pesos (10,000) a day for each violation, the imposition of which shall be final and
executory until reversed, modified or lifted by the Monetary Board on appeal.29
Koruga also accused Arcenas, et al. of violation of the Corporation Codes provisions on self-
dealing and conflict of interest. She invoked Section 31 of the Corporation Code, which defines
the liability of directors, trustees, or officers of a corporation for, among others, acquiring any
personal or pecuniary interest in conflict with their duty as directors or trustees, and Section 32,
which prescribes the conditions under which a contract of the corporation with one or more of
its directors or trustees the so-called "self-dealing directors"30 would be valid. She also
alleged that Banco Filipinos directors violated Sections 33 and 34 in approving the loans of
corporations with interlocking ownerships, i.e., owned, directed, or managed by close associates
of Albert C. Aguirre.
Sections 31 to 34 of the Corporation Code provide:
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly
222
and severally for all damages resulting therefrom suffered by the corporation, its stockholders
or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances.
Section 33. Contracts between corporations with interlocking directors. - Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to the latter for all such profits by refunding the
same, unless his act has been ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the venture.
Korugas invocation of the provisions of the Corporation Code is misplaced. In an earlier case
with similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying to all types of corporations, while the
New Central Bank Act regulates specifically banks and other financial institutions, including the
dissolution and liquidation thereof. As between a general and special law, the latter shall prevail
generalia specialibus non derogant.31
Consequently, it is not the Interim Rules of Procedure on Intra-Corporate Controversies,32 or
Rule 59 of the Rules of Civil Procedure on Receivership, that would apply to this case. Instead,
Sections 29 and 30 of the New Central Bank Act should be followed, viz.:
Section 29. Appointment of Conservator. - Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the Monetary Board finds that a bank or a
quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the Monetary Board shall deem necessary to take
charge of the assets, liabilities, and the management thereof, reorganize the management,
collect all monies and debts due said institution, and exercise all powers necessary to restore its
viability. The conservator shall report and be responsible to the Monetary Board and shall have
the power to overrule or revoke the actions of the previous management and board of directors
of the bank or quasi-bank.
xxxx
The Monetary Board shall terminate the conservatorship when it is satisfied that the institution
can continue to operate on its own and the conservatorship is no longer necessary. The
conservatorship shall likewise be terminated should the Monetary Board, on the basis of the
report of the conservator or of its own findings, determine that the continuance in business of
the institution would involve probable loss to its depositors or creditors, in which case the
provisions of Section 30 shall apply.
223
Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head
of the supervising or examining department, the Monetary Board finds that a bank or quasi-
bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided,
That this shall not include inability to pay caused by extraordinary demands induced by financial
panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities;
or
(c) cannot continue in business without involving probable losses to its depositors or creditors;
or
(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of the banking institution.
xxxx
The actions of the Monetary Board taken under this section or under Section 29 of this Act shall
be final and executory, and may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may
only be filed by the stockholders of record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the institution of the order directing
receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a receiver
under this section shall be vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the designation of a receiver.33
On the strength of these provisions, it is the Monetary Board that exercises exclusive jurisdiction
over proceedings for receivership of banks.
Crystal clear in Section 30 is the provision that says the "appointment of a receiver under this
section shall be vested exclusively with the Monetary Board." The term "exclusively" connotes
that only the Monetary Board can resolve the issue of whether a bank is to be placed under
receivership and, upon an affirmative finding, it also has authority to appoint a receiver. This is
further affirmed by the fact that the law allows the Monetary Board to take action "summarily
and without need for prior hearing."
And, as a clincher, the law explicitly provides that "actions of the Monetary Board taken under
this section or under Section 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on a petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction."1avvphi1
From the foregoing disquisition, there is no doubt that the RTC has no jurisdiction to hear and
decide a suit that seeks to place Banco Filipino under receivership.
Koruga herself recognizes the BSPs power over the allegedly unlawful acts of Banco Filipinos
directors. The records of this case bear out that Koruga, through her legal counsel, wrote the
Monetary Board34 on April 21, 2003 to bring to its attention the acts she had enumerated in
her complaint before the RTC. The letter reads in part:
Banco Filipino and the current members of its Board of Directors should be placed under
investigation for violations of banking laws, the commission of irregularities, and for conducting
business in an unsafe or unsound manner. They should likewise be placed under preventive
suspension by virtue of the powers granted to the Monetary Board under Section 37 of the
Central Bank Act. These blatant violations of banking laws should not go by without penalty.
They have put Banco Filipino, its depositors and stockholders, and the entire banking system
(sic) in jeopardy.
xxxx
We urge you to look into the matter in your capacity as regulators. Our clients, a minority
stockholders, (sic) and many depositors of Banco Filipino are prejudiced by a failure to regulate,
and taxpayers are prejudiced by accommodations granted by the BSP to Banco Filipino35
In a letter dated May 6, 2003, BSP Supervision and Examination Department III Director Candon
B. Guerrero referred Korugas letter to Arcenas for comment.36 On June 6, 2003, Banco
Filipinos then Executive Vice President and Corporate Secretary Francisco A. Rivera submitted
the banks comments essentially arguing that Korugas accusations lacked legal and factual
bases.37
On the other hand, the BSP, in its Answer before the RTC, said that it had been looking into
Banco Filipinos activities. An October 2002 Report of Examination (ROE) prepared by the
224
Supervision and Examination Department (SED) noted certain dacion payments, out-of-the-
ordinary expenses, among other dealings. On July 24, 2003, the Monetary Board passed
Resolution No. 1034 furnishing Banco Filipino a copy of the ROE with instructions for the bank
to file its comment or explanation within 30 to 90 days under threat of being fined or of being
subjected to other remedial actions. The ROE, the BSP said, covers substantially the same
matters raised in Korugas complaint. At the time of the filing of Korugas complaint on August
20, 2003, the period for Banco Filipino to submit its explanation had not yet expired.38
Thus, the courts jurisdiction could only have been invoked after the Monetary Board had taken
action on the matter and only on the ground that the action taken was in excess of jurisdiction
or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.
Finally, there is one other reason why Korugas complaint before the RTC cannot prosper. Given
her own admission and the same is likewise supported by evidence that she is merely a
minority stockholder of Banco Filipino, she would not have the standing to question the
Monetary Boards action. Section 30 of the New Central Bank Act provides:
The petition for certiorari may only be filed by the stockholders of record representing the
majority of the capital stock within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or conservatorship.
All the foregoing discussion yields the inevitable conclusion that the CA erred in upholding the
jurisdiction of, and remanding the case to, the RTC. Given that the RTC does not have jurisdiction
over the subject matter of the case, its refusal to dismiss the case on that ground amounted to
grave abuse of discretion.
WHEREFORE, the foregoing premises considered, the Petition in G.R. No. 168332 is DISMISSED,
while the Petition in G.R. No. 169053 is GRANTED. The Decision of the Court of Appeals dated
July 20, 2005 in CA-G.R. SP No. 88422 is hereby SET ASIDE. The Temporary Restraining Order
issued by this Court on March 13, 2006 is made PERMANENT. Consequently, Civil Case No. 03-
985, pending before the Regional Trial Court of Makati City, is DISMISSED.
SO ORDERED.
G.R. No. 135706 October 1, 2004
SPS. CESAR A. LARROBIS, JR. and VIRGINIA S. LARROBIS, petitioners,
vs.
PHILIPPINE VETERANS BANK, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review of the decision of the Regional Trial Court (RTC), Cebu City,
Branch 24, dated April 17, 1998,1 and the order denying petitioners motion for reconsideration
dated August 25, 1998, raising pure questions of law.2
The following facts are uncontroverted:
On March 3, 1980, petitioner spouses contracted a monetary loan with respondent Philippine
Veterans Bank in the amount of 135,000.00, evidenced by a promissory note, due and
demandable on February 27, 1981, and secured by a Real Estate Mortgage executed on their lot
together with the improvements thereon.
On March 23, 1985, the respondent bank went bankrupt and was placed under
receivership/liquidation by the Central Bank from April 25, 1985 until August 1992.3
On August 23, 1985, the bank, through Francisco Go, sent the spouses a demand letter for
"accounts receivable in the total amount of 6,345.00 as of August 15, 1984,"4 which pertains
to the insurance premiums advanced by respondent bank over the mortgaged property of
petitioners.5
On August 23, 1995, more than fourteen years from the time the loan became due and
demandable, respondent bank filed a petition for extrajudicial foreclosure of mortgage of
petitioners property.6 On October 18, 1995, the property was sold in a public auction by Sheriff
Arthur Cabigon with Philippine Veterans Bank as the lone bidder.
On April 26, 1996, petitioners filed a complaint with the RTC, Cebu City, to declare the extra-
judicial foreclosure and the subsequent sale thereof to respondent bank null and void.7
In the pre-trial conference, the parties agreed to limit the issue to whether or not the period
within which the bank was placed under receivership and liquidation was a fortuitous event
which suspended the running of the ten-year prescriptive period in bringing actions.8
225

On April 17, 1998, the RTC rendered its decision, the fallo of which reads:
WHEREFORE, premises considered judgment is hereby rendered dismissing the complaint for
lack of merit. Likewise the compulsory counterclaim of defendant is dismissed for being
unmeritorious.9
It reasoned that:
defendant bank was placed under receivership by the Central Bank from April 1985 until 1992.
The defendant bank was given authority by the Central Bank to operate as a private commercial
bank and became fully operational only on August 3, 1992. From April 1985 until July 1992,
defendant bank was restrained from doing its business. Doing business as construed by Justice
Laurel in 222 SCRA 131 refers to:
".a continuity of commercial dealings and arrangements and contemplates to that extent, the
performance of acts or words or the exercise of some of the functions normally incident to and
in progressive prosecution of the purpose and object of its organization."
The defendant banks right to foreclose the mortgaged property prescribes in ten (10) years but
such period was interrupted when it was placed under receivership. Article 1154 of the New
Civil Code to this effect provides:
"The period during which the obligee was prevented by a fortuitous event from enforcing his
right is not reckoned against him."
In the case of Provident Savings Bank vs. Court of Appeals, 222 SCRA 131, the Supreme Court
said.
"Having arrived at the conclusion that a foreclosure is part of a banks activity which could not
have been pursued by the receiver then because of the circumstances discussed in the Central
Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza
mayor in 1972 on account of the prohibition imposed by the Monetary Board against petitioner
from transacting business, until the directive of the Board was nullified in 1981. Indeed, the
period during which the obligee was prevented by a caso fortuito from enforcing his right is not
reckoned against him. (Art. 1154, NCC) When prescription is interrupted, all the benefits
acquired so far from the possession cease and when prescription starts anew, it will be entirely
a new one. This concept should not be equated with suspension where the past period is
included in the computation being added to the period after the prescription is presumed (4
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines 1991 ed. pp.
18-19), consequently, when the closure of the petitioner was set aside in 1981, the period of
ten years within which to foreclose under Art. 1142 of the N.C.C. began to run and, therefore,
the action filed on August 21, 1986 to compel petitioner to release the mortgage carried with it
the mistaken notion that petitioners own suit for foreclosure has prescribed."
Even assuming that the liquidation of defendant bank did not affect its right to foreclose the
plaintiffs mortgaged property, the questioned extrajudicial foreclosure was well within the ten
(10) year prescriptive period. It is noteworthy to mention at this point in time, that defendant
bank through authorized Deputy Francisco Go made the first extrajudicial demand to the
plaintiffs on August 1985. Then on March 24, 1995 defendant bank through its officer-in-charge
Llanto made the second extrajudicial demand. And we all know that a written extrajudicial
demand wipes out the period that has already elapsed and starts anew the prescriptive period.
(Ledesma vs. C.A., 224 SCRA 175.)10
Petitioners filed a motion for reconsideration which the RTC denied on August 25, 1998.11 Thus,
the present petition for review where petitioners claim that the RTC erred:
I
IN RULING THAT THE PERIOD WITHIN WHICH RESPONDENT BANK WAS PUT UNDER
RECEIVERSHIP AND LIQUIDATION WAS A FORTUITOUS EVENT THAT INTERRUPTED THE
RUNNING OF THE PRESCRIPTIVE PERIOD.
II
IN RULING THAT THE WRITTEN EXTRA-JUDICIAL DEMAND MADE BY RESPONDENT ON
PETITIONERS WIPED OUT THE PERIOD THAT HAD ALREADY ELAPSED.
III
IN DENYING PETITIONERS MOTION FOR RECONSIDERATION OF ITS HEREIN ASSAILED
DECISION.12
Petitioners argue that: since the extra-judicial foreclosure of the real estate mortgage was
effected by the bank on October 18, 1995, which was fourteen years from the date the
obligation became due on February 27, 1981, said foreclosure and the subsequent sale at public
auction should be set aside and declared null and void ab initio since they are already barred by
prescription; the court a quo erred in sustaining the respondents theory that its having been
placed under receivership by the Central Bank between April 1985 and August 1992 was a
fortuitous event that interrupted the running of the prescriptive period;13 the court a quos
226
reliance on the case of Provident Savings Bank vs. Court of Appeals14 is misplaced since they
have different sets of facts; in the present case, a liquidator was duly appointed for respondent
bank and there was no judgment or court order that would legally or physically hinder or
prohibit it from foreclosing petitioners property; despite the absence of such legal or physical
hindrance, respondent banks receiver or liquidator failed to foreclose petitioners property and
therefore such inaction should bind respondent bank;15 foreclosure of mortgages is part of the
receivers/liquidators duty of administering the banks assets for the benefit of its depositors
and creditors, thus, the ten-year prescriptive period which started on February 27, 1981, was
not interrupted by the time during which the respondent bank was placed under receivership;
and the Monetary Boards prohibition from doing business should not be construed as barring
any and all business dealings and transactions by the bank, otherwise, the specific mandate to
foreclose mortgages under Sec. 29 of R.A. No. 265 as amended by Executive Order No. 65 would
be rendered nugatory.16 Said provision reads:
Section 29. Proceedings upon Insolvency Whenever, upon examination by the head of the
appropriate supervising or examining department or his examiners or agents into the condition
of any bank or non-bank financial intermediary performing quasi-banking functions, it shall be
disclosed that the condition of the same is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, it shall be the duty of the department
head concerned forthwith, in writing, to inform the Monetary Board of the facts. The Board may,
upon finding the statements of the department head to be true, forbid the institution to do
business in the Philippines and designate the official of the Central Bank or a person of
recognized competence in banking or finance, as receiver to immediately take charge its assets
and liabilities, as expeditiously as possible, collect and gather all the assets and administer the
same for the benefit of its creditors, and represent the bank personally or through counsel as
he may retain in all actions or proceedings for or against the institution, exercising all the powers
necessary for these purposes including, but not limited to, bringing and foreclosing mortgages
in the name of the bank.
Petitioners further contend that: the demand letter, dated March 24, 1995, was sent after the
ten-year prescriptive period, thus it cannot be deemed to have revived a period that has already
elapsed; it is also not one of the instances enumerated by Art. 1115 of the Civil Code when
prescription is interrupted;17 and the August 23, 1985 letter by Francisco Go demanding
6,345.00, refers to the insurance premium on the house of petitioners, advanced by
respondent bank, thus such demand letter referred to another obligation and could not have
the effect of interrupting the running of the prescriptive period in favor of herein petitioners
insofar as foreclosure of the mortgage is concerned.18
Petitioners then prayed that respondent bank be ordered to pay them 100,000.00 as moral
damages, 50,000.00 as exemplary damages and 100,000.00 as attorneys fees.19
Respondent for its part asserts that: the period within which it was placed under receivership
and liquidation was a fortuitous event that interrupted the running of the prescriptive period
for the foreclosure of petitioners mortgaged property; within such period, it was specifically
restrained and immobilized from doing business which includes foreclosure proceedings; the
extra-judicial demand it made on March 24, 1995 wiped out the period that has already lapsed
and started anew the prescriptive period; respondent through its authorized deputy Francisco
Go made the first extra-judicial demand on the petitioners on August 23, 1985; while it is true
that the first demand letter of August 1985 pertained to the insurance premium advanced by it
over the mortgaged property of petitioners, the same however formed part of the latters total
loan obligation with respondent under the mortgage instrument and therefore constitutes a
valid extra-judicial demand made within the prescriptive period.20
In their Reply, petitioners reiterate their earlier arguments and add that it was respondent that
insured the mortgaged property thus it should not pass the obligation to petitioners through
the letter dated August 1985.21
To resolve this petition, two questions need to be answered: (1) Whether or not the period
within which the respondent bank was placed under receivership and liquidation proceedings
may be considered a fortuitous event which interrupted the running of the prescriptive period
in bringing actions; and (2) Whether or not the demand letter sent by respondent banks
representative on August 23, 1985 is sufficient to interrupt the running of the prescriptive
period.
Anent the first issue, we answer in the negative.
One characteristic of a fortuitous event, in a legal sense and consequently in relations to
contract, is that its occurrence must be such as to render it impossible for a party to fulfill his
obligation in a normal manner.22
Respondents claims that because of a fortuitous event, it was not able to exercise its right to
foreclose the mortgage on petitioners property; and that since it was banned from pursuing its
business and was placed under receivership from April 25, 1985 until August 1992, it could not
foreclose the mortgage on petitioners property within such period since foreclosure is
embraced in the phrase "doing business," are without merit.
While it is true that foreclosure falls within the broad definition of "doing business," that is:
227
a continuity of commercial dealings and arrangements and contemplates to that extent, the
performance of acts or words or the exercise of some of the functions normally incident to and
in progressive prosecution of the purpose and object of its organization.23
it should not be considered included, however, in the acts prohibited whenever banks are
"prohibited from doing business" during receivership and liquidation proceedings.
This we made clear in Banco Filipino Savings & Mortgage Bank vs. Monetary Board, Central Bank
of the Philippines24 where we explained that:
Section 29 of the Republic Act No. 265, as amended known as the Central Bank Act, provides
that when a bank is forbidden to do business in the Philippines and placed under receivership,
the person designated as receiver shall immediately take charge of the banks assets and
liabilities, as expeditiously as possible, collect and gather all the assets and administer the same
for the benefit of its creditors, and represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution, exercising all the powers
necessary for these purposes including, but not limited to, bringing and foreclosing mortgages
in the name of the bank.25
This is consistent with the purpose of receivership proceedings, i.e., to receive collectibles and
preserve the assets of the bank in substitution of its former management, and prevent the
dissipation of its assets to the detriment of the creditors of the bank.26
When a bank is declared insolvent and placed under receivership, the Central Bank, through the
Monetary Board, determines whether to proceed with the liquidation or reorganization of the
financially distressed bank. A receiver, who concurrently represents the bank, then takes control
and possession of its assets for the benefit of the banks creditors. A liquidator meanwhile
assumes the role of the receiver upon the determination by the Monetary Board that the bank
can no longer resume business. His task is to dispose of all the assets of the bank and effect
partial payments of the banks obligations in accordance with legal priority. In both receivership
and liquidation proceedings, the bank retains its juridical personality notwithstanding the
closure of its business and may even be sued as its corporate existence is assumed by the
receiver or liquidator. The receiver or liquidator meanwhile acts not only for the benefit of the
bank, but for its creditors as well.27
In Provident Savings Bank vs. Court of Appeals,28 we further stated that:
When a bank is prohibited from continuing to do business by the Central Bank and a receiver is
appointed for such bank, that bank would not be able to do new business, i.e., to grant new
loans or to accept new deposits. However, the receiver of the bank is in fact obliged to collect
debts owing to the bank, which debts form part of the assets of the bank. The receiver must
assemble the assets and pay the obligation of the bank under receivership, and take steps to
prevent dissipation of such assets. Accordingly, the receiver of the bank is obliged to collect pre-
existing debts due to the bank, and in connection therewith, to foreclose mortgages securing
such debts.29 (Emphasis supplied.)
It is true that we also held in said case that the period during which the bank was placed under
receivership was deemed fuerza mayor which validly interrupted the prescriptive period.30 This
is being invoked by the respondent and was used as basis by the trial court in its decision.
Contrary to the position of the respondent and court a quo however, such ruling does not find
application in the case at bar.
A close scrutiny of the Provident case, shows that the Court arrived at said conclusion, which is
an exception to the general rule, due to the peculiar circumstances of Provident Savings Bank at
the time. In said case, we stated that:
Having arrived at the conclusion that a foreclosure is part of a banks business activity which
could not have been pursued by the receiver then because of the circumstances discussed in
the Central Bank case, we are thus convinced that the prescriptive period was legally interrupted
by fuerza mayor in 1972 on account of the prohibition imposed by the Monetary Board against
petitioner from transacting business, until the directive of the Board was nullified in 1981.31
(Emphasis supplied.)
Further examination of the Central Bank case reveals that the circumstances of Provident
Savings Bank at the time were peculiar because after the Monetary Board issued MB Resolution
No. 1766 on September 15, 1972, prohibiting it from doing business in the Philippines, the
banks majority stockholders immediately went to the Court of First Instance of Manila, which
prompted the trial court to issue its judgment dated February 20, 1974, declaring null and void
the resolution and ordering the Central Bank to desist from liquidating Provident. The decision
was appealed to and affirmed by this Court in 1981. Thus, the Superintendent of Banks, which
was instructed to take charge of the assets of the bank in the name of the Monetary Board, had
no power to act as a receiver of the bank and carry out the obligations specified in Sec. 29 of the
Central Bank Act.32
In this case, it is not disputed that Philippine Veterans Bank was placed under receivership by
the Monetary Board of the Central Bank by virtue of Resolution No. 364 on April 25, 1985,
pursuant to Section 29 of the Central Bank Act on insolvency of banks.33
228
Unlike Provident Savings Bank, there was no legal prohibition imposed upon herein respondent
to deter its receiver and liquidator from performing their obligations under the law. Thus, the
ruling laid down in the Provident case cannot apply in the case at bar.
There is also no truth to respondents claim that it could not continue doing business from the
period of April 1985 to August 1992, the time it was under receivership. As correctly pointed out
by petitioner, respondent was even able to send petitioners a demand letter, through Francisco
Go, on August 23, 1985 for "accounts receivable in the total amount of 6,345.00 as of August
15, 1984" for the insurance premiums advanced by respondent bank over the mortgaged
property of petitioners. How it could send a demand letter on unpaid insurance premiums and
not foreclose the mortgage during the time it was "prohibited from doing business" was not
adequately explained by respondent.
Settled is the principle that a bank is bound by the acts, or failure to act of its receiver.34 As we
held in Philippine Veterans Bank vs. NLRC,35 a labor case which also involved respondent bank,
all the acts of the receiver and liquidator pertain to petitioner, both having assumed
petitioners corporate existence. Petitioner cannot disclaim liability by arguing that the non-
payment of MOLINAs just wages was committed by the liquidators during the liquidation
period.36
However, the bank may go after the receiver who is liable to it for any culpable or negligent
failure to collect the assets of such bank and to safeguard its assets.37
Having reached the conclusion that the period within which respondent bank was placed under
receivership and liquidation proceedings does not constitute a fortuitous event which
interrupted the prescriptive period in bringing actions, we now turn to the second issue on
whether or not the extra-judicial demand made by respondent bank, through Francisco Go, on
August 23, 1985 for the amount of 6,345.00, which pertained to the insurance premiums
advanced by the bank over the mortgaged property, constitutes a valid extra-judicial demand
which interrupted the running of the prescriptive period. Again, we answer this question in the
negative.
Prescription of actions is interrupted when they are filed before the court, when there is a
written extra-judicial demand by the creditors, and when there is any written acknowledgment
of the debt by the debtor.38
Respondents claim that while its first demand letter dated August 23, 1985 pertained to the
insurance premium it advanced over the mortgaged property of petitioners, the same formed
part of the latters total loan obligation with respondent under the mortgage instrument, and
therefore, constitutes a valid extra-judicial demand which interrupted the running of the
prescriptive period, is not plausible.
The real estate mortgage signed by the petitioners expressly states that:
This mortgage is constituted by the Mortgagor to secure the payment of the loan and/or credit
accommodation granted to the spouses Cesar A. Larrobis, Jr. and Virginia S. Larrobis in the
amount of ONE HUNDRED THIRTY FIVE THOUSAND (135,000.00) PESOS ONLY Philippine
Currency in favor of the herein Mortgagee.39
The promissory note, executed by the petitioners, also states that:
FOR VALUE RECEIVED, I/WE, JOINTLY AND SEVERALLY, PROMISE TO PAY THE PHILIPPINE
VETERANS BANK, OR ORDER, AT ITS OFFICE AT CEBU CITY THE SUM OF ONE HUNDRED THIRTY
FIVE THOUSAND PESOS (P135,000.00), PHILIPPINE CURRENCY WITH INTEREST AT THE RATE OF
FOURTEEN PER CENT (14%) PER ANNUM FROM THIS DATE UNTIL FULLY PAID.40
Considering that the mortgage contract and the promissory note refer only to the loan of
petitioners in the amount of 135,000.00, we have no reason to hold that the insurance
premiums, in the amount of 6,345.00, which was the subject of the August 1985 demand letter,
should be considered as pertaining to the entire obligation of petitioners.
In Quirino Gonzales Logging Concessionaire vs. Court of Appeals,41 we held that the notices of
foreclosure sent by the mortgagee to the mortgagor cannot be considered tantamount to
written extrajudicial demands, which may validly interrupt the running of the prescriptive
period, where it does not appear from the records that the notes are covered by the mortgage
contract.42
In this case, it is clear that the advanced payment of the insurance premiums is not part of the
mortgage contract and the promissory note signed by petitioners. They pertain only to the
amount of 135,000.00 which is the principal loan of petitioners plus interest. The arguments
of respondent bank on this point must therefore fail.
As to petitioners claim for damages, however, we find no sufficient basis to award the same.
For moral damages to be awarded, the claimant must satisfactorily prove the existence of the
factual basis of the damage and its causal relation to defendants acts.43 Exemplary damages
meanwhile, which are imposed as a deterrent against or as a negative incentive to curb socially
deleterious actions, may be awarded only after the claimant has proven that he is entitled to
moral, temperate or compensatory damages.44 Finally, as to attorneys fees, it is demanded
229
that there be factual, legal and equitable justification for its award.45 Since the bases for these
claims were not adequately proven by the petitioners, we find no reason to grant the same.
WHEREFORE, the decision of the Regional Trial Court, Cebu City, Branch 24, dated April 17, 1998,
and the order denying petitioners motion for reconsideration dated August 25, 1998 are hereby
REVERSED and SET ASIDE. The extra-judicial foreclosure of the real estate mortgage on October
18, 1995, is hereby declared null and void and respondent is ordered to return to petitioners
their owners duplicate certificate of title.
Costs against respondent.
SO ORDERED.
G.R. No. 156761 October 17, 2006
LADY LYDIA CORNISTA-DOMINGO, SYLVIA SALANGA, LIWAYWAY SILAPAN, CYNTHIA
ALICANTE, ALBERTO ANCHETA, ANA MARIA SANCHEZ, ELENA TUMBAGA, PEDRO JOSU,
TERESITA VOCAL, ROSIE ANCHETA, LILIA PINUELA-JULIAN, IMELDA ERESE, NORMA YABUT,
LOURDES PINEDA, CORAZON CARANDANG, ERLINDA GUTIERREZ, MARIO MILAN, FLAVIANO
MEJIA, JR., ESTELA AYSON, ENRIQUE GARAYGAY, ROSE DAILEG, JOSE CALDO, RITA BATAC,
MARIA CORAZON GALAN, MA. ELISA GAYO, DEBBIE RODRIGUEZ, CAROLINA CABEBE,
EDGARDO BOLIVAR, FE ILAGAN, TERESITA MONDEJAR, ELVIRA ANGELES, PEDRO EMPIG, LUZ
MARQUEZ, TERESITA DORIA, ABELARDO BONTOC, MADELON REYES-YEE and FILOMENO
CINCO, JR., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER EDUARDO J. CARPIO,
PHILIPPINE VETERANS BANK and/or SUNDAY LAVIN, PHILIPPINE VETERANS BANK
EMPLOYEES UNION and/or FELIZARDO SARAPAT, AMELITA DURIAN, RICARDO RICAFRENTE,
LEON MAGALONA, FERMIN CASTILLO, NORMINIO MOJICA and OLYMPIO DE GUZMAN,
respondents.
DECISION
GARCIA, J.:
By this petition for review on certiorari,1 petitioners seek the review and reversal of the
consolidated Decision2 dated December 21, 2001 of the Court of Appeals (CA) in CA-G.R. SP No.
51218, CA-G.R. SP No. 51219 and CA-G.R. SP No. 51220 declaring as null and void the September
14, 1993 decision and the November 22, 1993 resolution of the National Labor Relations
Commission (NLRC) and reinstating the decision dated March 31, 1993 of Labor Arbiter Eduardo
J. Carpio. Likewise, assailed is the CA Resolution of January 8, 2003, denying the petitioners'
motion for reconsideration.
The ultimate facts material to the resolution of the case are as follows:
On April 10, 1983, by virtue of Resolution No. 334 of the Central Bank's Monetary Board, the
Philippine Veterans Bank (Bank, hereafter) was placed under receivership.
In consequence, the Bank adopted a retrenchment and reorganization program which was
challenged before this Court by the Philippine Veterans Bank Employees Union (Union,
hereafter) on the ground that the program allegedly violated the security of tenure of the Bank's
230
employees, in G.R. No. 67125 entitled Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank.
While G.R. No. 67125 was pending, the Monetary Board issued Resolution No. 612, dated June
7, 1985, ordering the liquidation of the Bank. The Monetary Board then appointed a liquidator
who, pursuant to the authority vested by the same Board, terminated the employment of all
the employees of the Bank effective June 15, 1985. Thereafter, the liquidator commenced
payment of separation pay and other benefits to the terminated employees.
Although a number of the Bank employees accepted their separation pay and other benefits
and executed quitclaims and releases therefor in favor of the Bank, others chose to question
their termination. Thus, on September 25, 1985, the Union filed a supplemental petition for
prohibition with preliminary injunction in G.R. No. 67125 opposing Monetary Board Resolution
No. 612.
On August 24, 1990, the Court promulgated a consolidated3 en banc Decision4 in G.R. No. 67125
upholding the authority of the Monetary Board to place the respondent Bank under liquidation
as well as the legality of the termination of all the Bank's employees, including the members of
the Union. The Court also rejected the dismissed employees' claim for back wages as it held that
they were not illegally dismissed but lawfully separated as a result of the Bank's liquidation upon
order of the Monetary Board.
On January 2, 1992, Congress enacted Republic Act (R.A.) No. 7169,5 authorizing the Central
Bank to reopen the Bank.
To facilitate the implementation of R.A. No. 7169, a Rehabilitation Committee was created by
the Monetary Board. The committee thus created was given the power to select and to organize
an initial manning force headed by a management team to be staffed by a trained workforce.
Hiring preference was given the veterans and their dependents, other qualifications being
equal.6
At this juncture, several employees of the Bank initiated a series of cases claiming that the
enactment of R.A. No. 7169 nullified Monetary Board Resolution No. 612 placing respondent
Bank under liquidation and, in effect, also nullified the liquidator's termination of the Bank's
employees.
On January 20, 1992, the Union filed a petition with the Secretary of Labor and Employment
charging the Bank with unfair labor practices and praying that the Rehabilitation Committee be
directed to cease and desist from screening and hiring new employees and to immediately
reinstate the Bank's former employees. The petition, docketed as NLRC NCR No. 00-02426-92,
also sought payment of the accrued collective bargaining agreement benefits and back wages
of the employees from the time they were terminated from employment in 1985 up to the time
of their actual reinstatement. Several other petitions seeking essentially the same relief were
consolidated with NLRC NCR No. 00-02426-92.
In the meantime, on August 3, 1992, the respondent Bank resumed operations.
On March 31, 1993, Labor Arbiter Eduardo J. Carpio rendered a decision7 dismissing NLRC NCR
No. 00-02426-92 and all cases consolidated therewith for lack of merit. The dispositive portion
of said decision reads:
Wherefore, premises considered, the claim of the Union for reinstatement of the individual
complainants it represents as well as the claims for payment of backwages, other benefits and
damages are hereby, as they should be, dismissed for lack of merit.
The charge for unfair labor practice filed by the Union against the respondent Bank is likewise
dismissed for lack of factual and legal basis.
SO ORDERED.
In time, the Union appealed the Labor Arbiter's decision to the NLRC proper.
On September 14, 1993, the NLRC rendered a Decision8 reversing and setting aside that of the
Labor Arbiter. Additionally, the NLRC directed the immediate reinstatement of all Union
members subject to the operational requirements of the Bank which it likewise ordered to cease
and desist from further hiring new employees. More specifically, the fallo of the NLRC decision
reads:
ACCORDINGLY, the decision of the Labor Arbiter is hereby SET ASIDE and a new one entered,
finding the claim for reinstatement of the appellant to be legal and proper. Accordingly, Appellee
bank therefore is hereby ordered to immediately reinstate all members of the appellant union
inclusive of those who have executed their quitclaims and release and all the rest of the PVBEU
members, who will signify their intention to be reinstated from the date of this Decision. In the
meanwhile, however, that the bank has not fully reopened and activated all its operational
departments, offices and branches, the employees' reinstatement shall be conditioned to actual
personnel requirement of the department branch office to be reopened, for which reason,
preference shall be given to employees formerly occupying the position being reinstated or
reactivated or at the prerogative and discretion of management, to any position in the office
provided the latter is of equivalent rank and at least has the same rate of pay.
231
For this purpose, appellee is hereby ordered to temporarily cease and desist from further hiring
new employees which might affect the full compliance to this Decision. The claim for backwages
and other CBA benefits are hereby denied for lack merit.
The claim for unfair labor practice is also hereby denied for lack of merit.
SO ORDERED.
On October 1, 1993, the Bank sought a reconsideration of the said decision. Six days later, or on
October 7, 1993, the Union also moved for its partial reconsideration. Both motions, however,
were denied by the NLRC in its resolution of November 22, 1993.
Therefrom, the Bank and the Union interposed separate petitions to this Court.
The Bank, in its petition, docketed as G.R. No. 113423,9 sought to nullify the NLRC decision of
September 14, 1993, reinstating the members of the Union, and its Resolution of November 22,
1993, denying the Bank's motion for reconsideration. While in its petition, docketed as G.R. No.
115421,10 the Union sought a modification of the same decision so as to include the award of
backwages.
On January 26, 1996, while G.R. Nos. 113423 and 115421 were pending before the Court, the
Union, through its duly authorized officers, and the Bank entered into a Compromise
Agreement11 for the amicable settlement of all other cases and claims then pending with the
NLRC and/or other tribunals arising from the employment of the individual complainants with
the Bank.
A substantial majority of the members of the Union ratified the compromise agreement.
On February 16, 1996, Labor Arbiter Eduardo J. Carpio approved the compromise agreement
and issued an Order12 which reads:
WHEREFORE, finding the terms and conditions set forth in the Compromise Agreement to be
not contrary to law, morals and public policy, the same is hereby approved and considered as in
complete and full satisfaction of the Decision in the above-entitled case dated September 14,
1993.
The parties are hereby enjoined to comply strictly and faithfully with the terms and conditions
of the Compromise Agreement.
SO ORDERED.
A number of the employees, in separate appeals to the NLRC, contested the foregoing Order of
the Labor Arbiter. They argued that the compromise agreement is contrary to law and
jurisprudence.
On February 29, 1996, the Bank and the Union filed before the Court their Joint Motion to
Dismiss Petition in G.R. Cases No. 113423 and 115421.
In a Resolution dated June 17, 1996, the Court denied said Joint Motion. In the same resolution,
the Court gave due course to an Urgent Motion for Leave to Intervene and to Oppose Motion
to Dismiss Petition filed by the bank employees led by a certain Nestor Garcia and the Urgent
Motion With Leave of Court for Individual Union Members Petitioners to Intervene and to
Participate in Their Individual Capacities And To Oppose Joint Motion to Dismiss Petition filed
by the herein petitioners Lady Lydia Domingo, et al.
On October 2, 1996, the NLRC decided the aforementioned separate appeals from the Labor
Arbiter's Order of February 16, 1996 approving the compromise agreement. The NLRC ruled that
those who received and acknowledged receipt of the first payment, as agreed upon in the
questioned Compromise Agreement, and who executed the corresponding Quitclaim, Waiver
and Release were bound by the same Compromise Agreement. The decision dispositively reads:
WHEREFORE, in the interest of substantial justice and fair play, the order appealed from is
hereby partially vacated and Set Aside in that:
a) For those union members who received and acknowledged receipt of the first payment as
agreed upon in the Compromise Agreement dated January 26, 1996 and who executed the
corresponding Quitclaim, Waiver and Release will be bound by the said Compromise Agreement
which was made the basis of the Order dated February 16, 1996 appealed from and they shall
continue to receive the money due them on the second and third payments due on December
15, 1996 and December 15, 1997, respectively.
b) For those union members who signified their opposition and those who are similarly situated
who did not receive and acknowledge receipt of the money, let the case be remanded to the
Arbitration Branch of origin for further proceedings. The Labor Arbiter so designated to hear is
hereby ordered to proceed with dispatch so as not to prejudice the parties as the disposition
hereof has been duly delayed.
SO ORDERED.
232
Separate petitions were then filed with the Court by the Bank, the Union and the petitioners.
The Bank assailed the reinstatement of union members while the Union questioned the lack of
award for backwages. For their part, the petitioners questioned the validity of the compromise
agreement.
On December 7, 1998, the Court issued a Resolution referring the three aforesaid petitions to
the CA for appropriate action and disposition, pursuant to St. Martin Funeral Homes v. NLRC.13
In the CA, the Bank's petition, PVB v. NLRC, et al., was docketed as CA-G.R. SP No. 51218, that
of the Union, PVBEU-NUBE v. NLRC, et al., was docketed as CA-G.R. SP No. 51219, and that of
herein petitioners' Lady Lydia Cornista Domingo, et al. v. NLRC, et al., was docketed as CA-G.R.
SP No. 51220. The three (3) petitions were thereafter consolidated.
On December 21, 2001, the CA rendered the herein challenged consolidated decision declaring
that the NLRC gravely abused its discretion in ordering the reinstatement of the union members
and accordingly declared null and void its September 14, 1993 decision and the November 22,
1993 resolution, and instead reiterated the March 31, 1993 decision of the Labor Arbiter, to wit:
PREMISES CONSIDERED, the assailed NLRC decision dated September 14, 1993 as well as its
Resolution dated November 22, 1993 (CA-G.R. SP No. 51218) are both declared NULL and VOID
and SET ASIDE. The Decision dated March 31, 1993 of the Labor Arbiter Eduardo J. Carpio is
hereby ordered REINSTATED.
Accordingly, the other two (2) petitions, CA-G.R. SP No. 51219 and CA-G.R. SP No. 51220 are
hereby DISMISSED for lack of merit.
SO ORDERED.
Partly says the CA in its decision:
1. The Supreme Court said in G.R. No. 67125 (189 SCRA 14) that the PVB employees were not
"illegally dismissed but lawfully separated." This is a pronouncement, as categorical as can be,
that the employment relationship between the Bank and the separated employees had
definitely ceased to exist as of that time;
xxx xxx xxxx
4. It is a well-settled doctrine that reinstatement is proper only in cases of illegal dismissal. The
pronouncement of the Supreme Court that the PVB employees were "not illegally dismissed"
forecloses any right of reinstatement under any circumstance.
While the PVB employees concerned should be given priority in hiring, they cannot demand it
as a matter of right.
xxx xxx xxx
Evidently, Domingo, et al. ratified the Compromise Agreement and even voluntarily received the
first payment under that agreement, executing the corresponding Quitclaim, Waiver and
Release in the process. Having done that, they are deemed bound by the Compromise
Agreement under the previously discussed principle of res judicata and/or estoppel.
xxx xxx xxx
Petitioners are now before the Court via the present recourse essentially arguing that the CA
committed reversible error in foreclosing their right to be reinstated to their former
employment with the Bank upon its rehabilitation and in upholding the validity of the
Compromise Agreement entered into by the Bank and the Union.
Petitioners argue that the passage of R.A. No. 7169,14 which reopened and rehabilitated the
Bank, gave them the right to be reinstated and entitled them to the payment of back wages and
other benefits. They call the Court's attention to Congress Resolution No. 1104 expressing the
sentiments of some congressmen to give preference to veterans and their dependents in the
employment with the Bank. This resolution, according to petitioners, strengthens their claim for
reinstatement.
We are not persuaded.
As we see it, upon implementation of Monetary Board Resolution No. 612 and prior to the
passage of R.A. No. 7169, the Bank ceased to exist. Its subsequent rehabilitation was not an
ordinary rehabilitation. R.A. No. 7169 had to be passed as a legislative fiat to breathe life into
the Bank. While it is true that the Bank used its old name, a new law had to be enacted to
restructure its outstanding liabilities. As it is, the Bank's present state of finances, the enormous
cost of backwages and other benefits that have to be paid its employees seeking to be reinstated
would surely put an end to the economic viability of the Bank.
The enactment of R.A. No. 7169 did not nullify Monetary Board Resolution No. 612 which earlier
placed the Bank under liquidation and caused the termination of employment of the petitioners.
The Bank's subsequent rehabilitation did not, by any test of reason, "revive" what was already
a dead relationship between the petitioners and the Bank. Neither did such rehabilitation affect
the Court's pronouncement in Philippine Veterans Bank Employees Union-NUBE v. Philippine
Veterans Bank15 that the actions of the Monetary Board and its duly appointed liquidator were
233
valid and that the former employees' claim for back wages must be rejected as they were
lawfully separated. Reinstatement is a relief accorded only to an employee who was illegally
dismissed.16
To reiterate, the forcible closure of the Bank by operation of law permanently severed the
employer-employee relationship between it and its employees when it ceased operations from
April 10, 1983 to August 3, 1992. Thus, the claim for reinstatement and payment of back wages
and other benefits, having no leg to stand on, must necessarily fall.
Whilst House Resolution No. 1104 expressed sentiments of some congressmen that
"preferential right to employment be given to veterans and their dependents" under Section
7(b) of R.A. No. 7169, without more, such sentiments did not operate as a compulsion to the
newly opened Bank to accept an employee earlier separated from work as a result of its closure.
If at all, such sentiments only provide that all things being equal, preference shall be given to
veterans and their dependents in the hiring of new employees. While the employees concerned
should be given priority in hiring, they cannot demand it as a matter of right.
Verily, the clear wordings of Section 7 of R.A. No. 7169 gave the rehabilitation committee
created thereunder a free hand in the selection and appointment of the Bank's new employees.
We quote Section 7 of the law:
Sec. 7. Rehabilitation Committee. To facilitate the implementation of the provisions this Act,
there is hereby created a rehabilitation committee which shall have a term of three (3) months
from the date of the approval of this Act composed of the following: the Executive Secretary, as
Chairman, and the Administrator of the Philippine Veterans Affairs Office, the President of the
Veterans Federation of the Philippines, a representative from the executive board of the
Veterans Federation of the Philippines and a representative from the Board of Trustees of the
Veterans of World War II or their respective representatives, as members.
Specifically, the committee shall:
(a) Prepare, finalize and submit a viable rehabilitation plan to the Monetary Board of the Central
Bank;
(b) Select and organize an initial manning force headed by a management team to be composed
of competent, experienced and professional managers who must possess all qualifications and
none of the disqualifications provided under Central Bank rules and regulations. The
management team shall be staffed by a trained workforce: Provided, That preference shall be
given to the veterans and their dependents, other qualifications being equal;
The mandate given the Bank's rehabilitation committee to "select and organize an initial
manning force" shows that the lawmakers recognize the fact that the new bank is entirely
without any working force. Congress, therefore, gave the Bank full authority and discretion to
recruit and form a new staff. Had Congress intended that separated employees be rehired and
given priority in the hiring of new employees, it would have clearly stated this in R.A. No. 7169.
The fact that it did not only shows its clear legislative intent to give the new bank a free hand in
the selection and hiring of its new staff.
We have to acknowledge the sad reality that giving in to petitioners' demand of wholesale
reinstatement with back wages, bonuses, holiday pay, vacation and sick leave benefits would be
a fatal blow to the very intention of R.A. No. 7169 to rehabilitate the Bank. The payment of such
substantial amounts would definitely further dissipate the remaining assets of the Bank and
cripple its finances even as, at this point, the Bank is barely making a profit under the weight of
its present liabilities, and ultimately make impossible its desired rehabilitation. This clearly
contravenes the intent and spirit of R.A. No. 7169.
Petitioners fault the CA in upholding the validity of the Compromise Agreement. They claim that
said agreement is not binding on employees who did not ratify it and even to those who were
allegedly tricked and/or deceived by the Union into accepting the first payment under the same
agreement.
The argument is utterly baseless. A labor union's function is to represent its members. It can file
an action or enter into compromise agreements on behalf of its members. Here, majority of the
Bank's employees authorized the Union to enter into a compromise agreement with the Bank
on their behalves. Union members were bound by the resulting compromise agreement when
they affixed their signatures thereon, thereby giving their individual assent thereto, and when
they accepted the benefits due them under that agreement. As it is, the Compromise Agreement
in question detailed the amounts to be received by each employee. Petitioners and other
employees of the Bank knew exactly what they were ratifying when they affixed their signatures
in the said compromise agreement.
Further, respondent Union is a closed shop union. For this reason, it was the only one with legal
authority to negotiate, transact, and enter into any agreement with the Bank. The Compromise
Agreement was ratified by 282 Union members representing a majority of its entire 529
membership. The ratification of the Compromise Agreement by the majority of the Union
members necessarily binds the minority.
The general rule that the Labor Arbiter must be present during the signing of the compromise
agreement is not immune to certain exceptions. Here, the submission of the Compromise
Agreement on joint motion of the parties for approval by the Labor Arbiter cured whatever
234
defect the signing of the agreement in the absence of the Labor Arbiter would have caused. So
it is that in Santiago v. De Guzman,17 the Court ruled:
A compromise agreement entered into by the parties not in the presence of the Labor Arbiter
before whom the case is pending shall be approved by him, if after confronting the parties,
particularly the complainants, he is satisfied that they understand the terms and conditions of
"the settlement and that it was entered into freely and voluntarily by them.
It is incumbent upon the Labor Arbiter not only to persuade the parties to settle amicably, but
equally to ensure the compromise agreement is a fair one and that the same was forged freely,
voluntarily with full understanding of the terms and conditions embodies therein as well as the
consequences thereof."
It is likewise noteworthy that as of March 31, 2004, thirty (30) of the herein thirty-seven (37)
petitioners already received payment under the same Compromise Agreement. The acceptance
by said petitioners of the benefits bars them from repudiating the agreement. They cannot be
allowed to adopt an inconsistent position at the expense of the Bank. Petitioners cannot
belatedly reject or repudiate their acts of accepting the monetary consideration under the
compromise agreement, to the prejudice of the Bank.18 We, thus, quote with approval the
following observation of the CA in its challenged Decision of December 21, 2001:
As regards the third petition for certiorari filed by Lady Lydia Cornista Domingo, et. al. (CA-G.R.
SP No. 51220), the position taken by the petitioners is that NLRC committed grave abuse of
discretion by: a) ordering petitioners who received the first payment under the Compromise
Agreement to be bound by it, and b) resolving to remand the case to the Labor Arbiter for further
proceedings insofar as those who did not receive payment are concerned.
Petitioners Domingo et. al. allege that "(a)s found out by the respondent NLRC, the Compromise
Agreement was not entered into in the presence of the labor Arbiter and it (NLRC) faulted the
latter in not calling the parties especially the complainants, to a conference and satisfy himself
that they (complainants) understand the terms and conditions of the settlement; and that the
agreement was entered into freely and voluntarily" (Rollo of SP No. 51218-20, p. 886) as called
for under Section 2, Rule V of the New Rules of Procedure of the NLRC.
Further, petitioners contend that "(h)ad the respondents NLRC and Labor Arbiter Carpio
followed the rules, they would have found out that those who received the first payment were
only tricked and deceived in(to) receiving the payment;" that "had the respondents Labor
Arbiter and NLRC been more circumspect in their solemn duties, they should have required the
respondent union officers to present a special power of attorney as required under Article
1878(3) of the Civil Code." (Ibid., pp. 886-887).
We are not convinced.
Evidently, Domingo, et. al. ratified the Compromise Agreement and even voluntarily received
the first payment under that agreement, executing the corresponding Quitclaim, Waiver and
Release in the process. Having done that, they are deemed bound by the Compromise
Agreement under the previously discussed principle of res judicata and/or estoppel.
We find that the subsequent decision of petitioners Domingo, et. al. to repudiate the
Compromise Agreement was merely an afterthought, whatever would be the reason for their
subsequent change of mind. Since they had entered into a binding contract on their own volition
and received benefits therefrom, they are therefore estopped from questioning the validity of
said contract later on. Parenthetically, it is interesting to note that while the petitioners try to
impugn the Compromise Agreement that they themselves entered into, they have not made
any offer or effort to return the money they received as first payment under said agreement.
The other allegation of the petitioners that "those who received the first payment were only
tricked and deceived in(to) receiving the payment" deserves scant consideration. Said
petitioners are not only ordinary laborers but mature, educated and intelligent people with
college degrees, and considering the size of their group, it is unbelievable that they could have
been easily duped into doing something against their will and self-interest. Absent a showing
that they were indeed victims of trickery and deception, outside of their own self-serving
affidavits, the petitioners' allegation does not hold water.
Here, the petitioners and other employees legally separated were in fact given termination or
separation pay despite the staggering loss sustained by the Bank. They were given a very good
bargain in the compromise agreement. They, therefore, have no reason to complain. Without
the subject compromise agreement, they would not have received any separation pay in light
of our ruling in State Investment House, Inc. v. CA,19 and North Davao Mining Corporation v.
NLRC,20 where we held that in cases of serious losses or financial reverses, the Labor Code does
not impose any obligation upon the employer to pay separation benefits, for obvious reasons.
Records reveal that when the Bank offered termination or separation pay to its remaining
employees by way of a compromise agreement, a great majority of them accepted the amount
as justifiable settlement of their claims.21 Like these quitclaims and releases, there are
voluntary agreements which represent reasonable settlements and are considered binding on
the parties.22 Petitioners, therefore, cannot renege on the compromise agreement they
entered into after accepting benefits earlier simply because they may have felt that they
committed a mistake in accepting their termination/separation pay. As no proof was presented
to show that the compromise agreement in dispute was entered into through fraud,
235
misrepresentation or coercion, the same must be recognized as valid and binding upon all the G.R. No. 150886 February 16, 2007
529 employees of the Bank. In fine, the petitioners and the other employees are estopped from
questioning the validity of the Compromise Agreement. RURAL BANK OF SAN MIGUEL, INC. and HILARIO P. SORIANO, in his capacity as majority
stockholder in the Rural Bankof San Miguel, Inc., Petitioners,
In law, a compromise agreement, once approved, has the effect of res judicata between the vs.
parties and should not be disturbed except for vices of consent, forgery, fraud, MONETARY BOARD, BANGKO SENTRAL NG PILIPINAS and PHILIPPINE DEPOSIT INSURANCE
misrepresentation and coercion,23 none of which exists in this case. The Compromise CORPORATION, Respondents.
Agreement between the Union and the Bank binds the minority Union members.
DECISION
All told, the Court finds and so holds that the CA committed no reversible error in rendering its
challenged decision of December 21, 2001 and Resolution of January 8, 2003. CORONA, J.:

IN VIEW WHEREOF, the instant petition is DENIED. This is a petition for review on certiorari1 of a decision2 and resolution3 of the Court of Appeals
(CA) dated March 28, 2000 and November 13, 2001, respectively, in CA-G.R. SP No. 57112.
No pronouncement as to costs.
Petitioner Rural Bank of San Miguel, Inc. (RBSM) was a domestic corporation engaged in
SO ORDERED. banking. It started operations in 1962 and by year 2000 had 15 branches in Bulacan.4 Petitioner
Hilario P. Soriano claims to be the majority stockholder of its outstanding shares of stock.5

On January 21, 2000, respondent Monetary Board (MB), the governing board of respondent
Bangko Sentral ng Pilipinas (BSP), issued Resolution No. 105 prohibiting RBSM from doing
business in the Philippines, placing it under receivership and designating respondent Philippine
Deposit Insurance Corporation (PDIC) as receiver:

On the basis of the comptrollership/monitoring report as of October 31, 1999 as reported by

Mr. Wilfredo B. Domo-ong, Director, Department of Rural Banks, in his memorandum dated
January 20, 2000, which report showed that [RBSM] (a) is unable to pay its liabilities as they
become due in the ordinary course of business; (b) cannot continue in business without
involving probable losses to its depositors and creditors; that the management of the bank had
been accordingly informed of the need to infuse additional capital to place the bank in a solvent
financial condition and was given adequate time within which to make the required infusion and
that no infusion of adequate fresh capital was made, the Board decided as follows:

1. To prohibit the bank from doing business in the Philippines and to place its assets and affairs
under receivership in accordance with Section 30 of [RA 7653];

2. To designate the [PDIC] as receiver of the bank;

xxx xxx xxx6

236
On January 31, 2000, petitioners filed a petition for certiorari and prohibition in the Regional
Trial Court (RTC) of Malolos, Branch 22 to nullify and set aside Resolution No. 105.7 However, The findings of the comptroller on the financial state of RBSM as of October 31, 1999 in
on February 7, 2000, petitioners filed a notice of withdrawal in the RTC and, on the same day, comparison with the financial condition as of December 31, 1999 is summed up pertinently as
filed a special civil action for certiorari and prohibition in the CA. On February 8, 2000, the RTC follows:
dismissed the case pursuant to Section 1, Rule 17 of the Rules of Court.8
FINANCIAL CONDITION OF RBSM
The CAs findings of facts were as follows.
As of Oct. 31, 1999 As of Dec. 31, 1999
To assist its impaired liquidity and operations, the RBSM was granted emergency loans on Total obligations/
different occasions in the aggregate amount of 375 [million]. Liabilities 1,076,863,000.00 1,009,898,000.00
Realizable Assets 898,588,000.00 796,930,000.00
As early as November 18, 1998, Land Bank of the Philippines (LBP) advised RBSM that it will Deficit 178,275,000.00 212,968,000.00
terminate the clearing of RBSMs checks in view of the latters frequent clearing losses and Cash on Hand 101,441.547.00 8,266,450.00
continuing failure to replenish its Special Clearing Demand Deposit with LBP. The BSP interceded Required Capital Infusion 252,120,000.00
with LBP not to terminate the clearing arrangement of RBSM to protect the interests of RBSMs
depositors and creditors. Capital Infusion 5,000,000.00

After a year, or on November 29, 1999, the LBP informed the BSP of the termination of the
clearing facility of RBSM to take effect on December 29, 1999, in view of the clearing problems
of RBSM.
On December 28, 1999, the MB approved the release of 26.189 [million] which is the last
tranche of the 375 million emergency loan for the sole purpose of servicing and meeting the
withdrawals of its depositors. Of the 26.180 million, xxx 12.6 million xxx was not used to
service withdrawals [and] remains unaccounted for as admitted by [RBSMs Treasury Officer and
Officer-in-Charge of Treasury]. Instead of servicing withdrawals of depositors, RBSM paid
Forcecollect Professional Solution, Inc. and Surecollect Professional, Inc., entities which are
owned and controlled by Hilario P. Soriano and other RBSM officers.
On January 4, 2000, RBSM declared a bank holiday. RBSM and all of its 15 branches were closed
from doing business.
Alarmed and disturbed by the unilateral declaration of bank holiday, [BSP] wanted to examine
the books and records of RBSM but encountered problems.
Meanwhile, on November 10, 1999, RBSMs designated comptroller, Ms. Zenaida Cabais of the
BSP, submitted to the Department of Rural Banks, BSP, a Comptrollership Report on her findings
on the financial condition and operations of the bank as of October 31, 1999. Another set of
findings was submitted by said comptroller [and] this second report reflected the financial status
of RBSM as of December 31, 1999.
(On Dec. 20, 1999)
Actual Breakdown of Total Obligations:
1) Deposits of 20,000 depositors 578,201,000.00
2) Borrowings from BSP 320,907,000.00
3) Unremitted withholding and gross receipt taxes 57,403,000.00.9
Based on these comptrollership reports, the director of the Department of Rural Banks
Supervision and Examination Sector, Wilfredo B. Domo-ong, made a report to the MB dated
January 20, 2000.10 The MB, after evaluating and deliberating on the findings and
recommendation of the Department of Rural Banks Supervision and Examination Sector, issued
Resolution No. 105 on January 21, 2000.11 Thereafter, PDIC implemented the closure order and
took over the management of RBSMs assets and affairs.
In their petition12 before the CA, petitioners claimed that respondents MB and BSP committed
grave abuse of discretion in issuing Resolution No. 105. The petition was dismissed by the CA on
March 28, 2000. It held, among others, that the decision of the MB to issue Resolution No. 105
was based on the findings and recommendations of the Department of Rural Banks Supervision
and Examination Sector, the comptroller reports as of October 31, 1999 and December 31, 1999
and the declaration of a bank holiday. Such could be considered as substantial evidence.13

237
Pertinently, on June 9, 2000, on the basis of reports prepared by PDIC stating that RBSM could
not resume business with sufficient assurance of protecting the interest of its depositors,
creditors and the general public, the MB passed Resolution No. 966 directing PDIC to proceed
with the liquidation of RBSM under Section 30 of RA 7653.14
Hence this petition.
It is well-settled that the closure of a bank may be considered as an exercise of police power.15
The action of the MB on this matter is final and executory.16 Such exercise may nonetheless be
subject to judicial inquiry and can be set aside if found to be in excess of jurisdiction or with such
grave abuse of discretion as to amount to lack or excess of jurisdiction.17
Petitioners argue that Resolution No. 105 was bereft of any basis considering that no complete
examination had been conducted before it was issued. This case essentially boils down to one
core issue: whether Section 30 of RA 7653 (also known as the New Central Bank Act) and
applicable jurisprudence require a current and complete examination of the bank before it can
be closed and placed under receivership.
Section 30 of RA 7653 provides:
SECTION 30. Proceedings in Receivership and Liquidation. Whenever, upon report of the head
of the supervising or examining department, the Monetary Board finds that a bank or quasi-
bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided,
That this shall not include inability to pay caused by extraordinary demands induced by financial
panic in the banking community;
(b) has insufficient realizable assets, as determined by the [BSP] to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or creditors;
or
(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of the banking institution.
xxx xxx xxx
The actions of the Monetary Board taken under this section or under Section 29 of this Act shall
be final and executory, and may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may
only be filed by the stockholders of record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the institution of the order directing
receivership, liquidation or conservatorship. (Emphasis supplied)
xxx xxx xxx
Petitioners contend that there must be a current, thorough and complete examination before a
bank can be closed under Section 30 of RA 7653. They argue that this section should be
harmonized with Sections 25 and 28 of the same law:
SECTION 25. Supervision and Examination. The [BSP] shall have supervision over, and conduct
periodic or special examinations of, banking institutions and quasi-banks, including their
subsidiaries and affiliates engaged in allied activities.
xxx xxx xxx
SECTION 28. Examination and Fees. The supervising and examining department head,
personally or by deputy, shall examine the books of every banking institution once in every
twelve (12) months, and at such other time as the Monetary Board by an affirmative vote of five
(5) members may deem expedient and to make a report on the same to the Monetary Board:
Provided that there shall be an interval of at least twelve (12) months between annual
examinations. (Emphasis supplied)
xxx xxx xxx
According to the petitioners, it is clear from these provisions that the "report of the supervising
or examining department" required under Section 30 refers to the report on the examination of
the bank which, under Section 28, must be made to the MB after the supervising or examining
head conducts an examination mandated by Sections 25 and 28.18 They cite Banco Filipino
Savings & Mortgage Bank v. Monetary Board, Central Bank of the Philippines19 wherein the
Court ruled:
There is no question that under Section 29 of the Central Bank Act, the following are the
mandatory requirements to be complied with before a bank found to be insolvent is ordered
closed and forbidden to do business in the Philippines: Firstly, an examination shall be
238
conducted by the head of the appropriate supervising or examining department or his
examiners or agents into the condition of the bank; secondly, it shall be disclosed in the
examination that the condition of the bank is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or creditors; thirdly, the department head
concerned shall inform the Monetary Board in writing, of the facts; and lastly, the Monetary
Board shall find the statements of the department head to be true.20 (Emphasis supplied)
Petitioners assert that an examination is necessary and not a mere report, otherwise the
decision to close a bank would be arbitrary.
Respondents counter that RA 7653 merely requires a report of the head of the supervising or
examining department. They maintain that the term "report" under Section 30 and the word
"examination" used in Section 29 of the old law are not synonymous. "Examination" connotes
in-depth analysis, evaluation, inquiry or investigation while "report" connotes a simple
disclosure or narration of facts for informative purposes.21
Petitioners contention has no merit. Banco Filipino and other cases petitioners cited22 were
decided using Section 29 of the old law (RA 265):
SECTION 29. Proceedings upon insolvency. Whenever, upon examination by the head of the
appropriate supervising or examining department or his examiners or agents into the condition
of any bank or non-bank financial intermediary performing quasi-banking functions, it shall be
disclosed that the condition of the same is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, it shall be the duty of the department
head concerned forthwith, in writing, to inform the Monetary Board of the facts. The Board may,
upon finding the statements of the department head to be true, forbid the institution to do
business in the Philippines and designate an official of the Central Bank or a person of recognized
competence in banking or finance, as receiver to immediately take charge of its assets and
liabilities, as expeditiously as possible collect and gather all the assets and administer the same
for the benefits of its creditors, and represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution, exercising all the powers
necessary for these purposes including, but not limited to, bringing and foreclosing mortgages
in the name of the bank or non-bank financial intermediary performing quasi-banking functions.
(Emphasis supplied)
xxx xxx xxx
Thus in Banco Filipino, we ruled that an "examination [conducted] by the head of the
appropriate supervising or examining department or his examiners or agents into the condition
of the bank"23 is necessary before the MB can order its closure.
However, RA 265, including Section 29 thereof, was expressly repealed by RA 7653 which took
effect in 1993. Resolution No. 105 was issued on January 21, 2000. Hence, petitioners reliance
on Banco Filipino which was decided under RA 265 was misplaced.
In RA 7653, only a "report of the head of the supervising or examining department" is necessary.
It is an established rule in statutory construction that where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied without
attempted interpretation:24
This plain meaning rule or verba legis derived from the maxim index animi sermo est (speech is
the index of intention) rests on the valid presumption that the words employed by the
legislature in a statute correctly express its intention or will and preclude the court from
construing it differently. The legislature is presumed to know the meaning of the words, to have
used words advisedly, and to have expressed its intent by use of such words as are found in the
statute. Verba legis non est recedendum, or from the words of a statute there should be no
departure.25
The word "report" has a definite and unambiguous meaning which is clearly different from
"examination." A report, as a noun, may be defined as "something that gives information" or "a
usually detailed account or statement."26 On the other hand, an examination is "a search,
investigation or scrutiny."27
This Court cannot look for or impose another meaning on the term "report" or to construe it as
synonymous with "examination." From the words used in Section 30, it is clear that RA 7653 no
longer requires that an examination be made before the MB can issue a closure order. We
cannot make it a requirement in the absence of legal basis.
Indeed, the court may consider the spirit and reason of the statute, where a literal meaning
would lead to absurdity, contradiction, injustice, or would defeat the clear purpose of the
lawmakers.28 However, these problems are not present here. Using the literal meaning of
"report" does not lead to absurdity, contradiction or injustice. Neither does it defeat the intent
of the legislators. The purpose of the law is to make the closure of a bank summary and
expeditious in order to protect public interest. This is also why prior notice and hearing are no
longer required before a bank can be closed.29
Laying down the requisites for the closure of a bank under the law is the prerogative of the
legislature and what its wisdom dictates. The lawmakers could have easily retained the word
"examination" (and in the process also preserved the jurisprudence attached to it) but they did
not and instead opted to use the word "report." The insistence on an examination is not
239
sanctioned by RA 7653 and we would be guilty of judicial legislation were we to make it a
requirement when such is not supported by the language of the law.
What is being raised here as grave abuse of discretion on the part of the respondents was the
lack of an examination and not the supposed arbitrariness with which the conclusions of the
director of the Department of Rural Banks Supervision and Examination Sector had been
reached in the report which became the basis of Resolution No. 105.1awphi1.net
The absence of an examination before the closure of RBSM did not mean that there was no basis
for the closure order. Needless to say, the decision of the MB and BSP, like any other
administrative body, must have something to support itself and its findings of fact must be
supported by substantial evidence. But it is clear under RA 7653 that the basis need not arise
from an examination as required in the old law.
We thus rule that the MB had sufficient basis to arrive at a sound conclusion that there were
grounds that would justify RBSMs closure. It relied on the report of Mr. Domo-ong, the head of
the supervising or examining department, with the findings that: (1) RBSM was unable to pay its
liabilities as they became due in the ordinary course of business and (2) that it could not continue
in business without incurring probable losses to its depositors and creditors.30 The report was
a 50-page memorandum detailing the facts supporting those grounds, an extensive chronology
of events revealing the multitude of problems which faced RBSM and the recommendations
based on those findings.
In short, MB and BSP complied with all the requirements of RA 7653. By relying on a report
before placing a bank under receivership, the MB and BSP did not only follow the letter of the
law, they were also faithful to its spirit, which was to act expeditiously. Accordingly, the issuance
of Resolution No. 105 was untainted with arbitrariness.
Having dispensed with the issue decisive of this case, it becomes unnecessary to resolve the
other minor issues raised.31
WHEREFORE, the petition is hereby DENIED. The March 28, 2000 decision and November 13,
2001 resolution of the Court of Appeals in CA-G.R. SP No. 57112 are AFFIRMED.
Costs against petitioners.
SO ORDERED.
G.R. No. 148491 February 8, 2007
SPOUSES ZACARIAS BACOLOR and CATHERINE BACOLOR, Petitioners,
vs.
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, DAGUPAN CITY BRANCH and MARCELINO
C. BONUAN, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision 1 of the Court of Appeals in CA-G.R. CV No. 47732 promulgated on
February 23, 2001 and its Resolution dated May 30, 2001.
On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein petitioners, obtained a
loan of 244,000.00 from Banco Filipino Savings and Mortgage Bank, Dagupan City Branch,
respondent. They executed a promissory note providing that the amount shall be payable within
a period of ten (10) years with a monthly amortization of P5,380.00 beginning March 11, 1982
and every 11th day of the month thereafter; that the interest rate shall be twenty-four percent
(24%) per annum, with a penalty of three percent (3%) on any unpaid monthly amortization;
that there shall be a service charge of three percent (3%) per annum on the loan; and that in
case respondent bank seeks the assistance of counsel to enforce the collection of the loan,
petitioners shall be liable for ten percent (10%) of the amount due as attorneys fees and fifteen
percent (15%) of the amount due as liquidated damages.
As security for the loan, petitioners mortgaged with respondent bank their parcel of land located
in Dagupan City, Pangasinan, registered under Transfer Certificate of Title No. 40827.
From March 11, 1982 to July 10, 1991, petitioners paid respondent bank 412, 199.36.
Thereafter, they failed to pay the remaining balance of the loan.
On August 7, 1992, petitioners received from respondent bank a statement of account stating
that their indebtedness as of July 31, 1992 amounts to 840,845.61.
In its letter dated January 13, 1993, respondent bank informed petitioners that should they fail
to pay their loan within fifteen (15) days from notice, appropriate action shall be taken against
them.
240
Due to petitioners failure to settle their obligation, respondent instituted, on March 5, 1993, an
action for extra-judicial foreclosure of mortgage.
Prior thereto, or on February 1, 1993, petitioners filed with Branch 40 of the same RTC, a
complaint for violation of the Usury Law against respondent, docketed as Civil Case No. D-10480.
They alleged that the provisions of the promissory note constitute a usurious transaction
considering the (1) rate of interest, (2) the rate of penalties, service charge, attorneys fees and
liquidated damages, and (3) deductions for surcharges and insurance premium. In their
amended complaint, petitioners further alleged that, during the closure of respondent bank, it
ceased to be a banking institution and, therefore, could not charge interests and institute
foreclosure proceeding.
On August 25, 1994, the RTC rendered its decision dismissing petitioners complaint, holding
that:
(1) The terms and conditions of the Deed of Mortgage and the Promissory Note are legal and
not usurious.
The plaintiff freely signed the Deed of Mortgage and the Promissory Note with full knowledge
of its terms and conditions.
The interest rate of 24% per annum is not usurious and does not violate the Usury Law (Act
2655) as amended by P.D. No. 166.
The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money etc., regardless of maturity x x x, shall not be subject to any ceiling
under or pursuant to the Usury Law, as amended (CB Circular no. 905). Hence, the 24% interest
per annum is allowed under P.D. No. 166.
For sometime now, usury has been legally non-existent. Interest can now be as lender and
borrower may agree upon (Verdejo v. CA, Jan. 29, 1988. 157 SCRA 743).
The imposition of penalties in case the obligation is not fulfilled is not prohibited by the Usury
Law. Parties to a contract of loan may validly agree upon the imposition of penalty charges in
case of delay or non-payment of the loan. The purpose is to compel the debtor to pay his debt
on time (Go Chioco v. Martinez, 45 Phil. 256, 265).
(2) The closure of Banco Filipino did not suspend or stop its usual and normal banking operations
like the collection of loan receivables and foreclosures of mortgages.
In view of the foregoing, plaintiffs failed to substantiate their cause of action against the
defendant. 2
On appeal, the Court of Appeals rendered its Decision affirming the Decision of the trial court.
Petitioners subsequent motion for reconsideration was denied.
Hence, this present petition for review on certiorari raising this lone issue: whether the interest
rate is "excessive and unconscionable."
It is the petitioners contention that while the Usury Law ceiling on interest rates was lifted by
Central Bank Circular No. 905, there is nothing in the said circular which grants respondent bank
carte blanche authority to raise interest rates to levels which "either enslave the borrower or
lead to a hemorrhaging of their assets." 3
In its comment 4 , respondent bank maintained that petitioner, by signing the Deed of Mortgage
and Promissory Note, knowingly and freely consented to its terms and conditions. A contract
between the parties must not be impaired. The interest rate of 24% per annum is not usurious
and does not violate the Usury Law. 5
The petition lacks merit.
Article 1956 of the Civil Code provides that no interest shall be due unless it has been expressly
stipulated in writing. Here, the parties agreed in writing on February 11, 1982 that the rate of
interest on the petitioners loan shall be 24% per annum.
At the time the parties entered into the loan transaction, the applicable law was the Usury Law
(Act 2655), as amended by P.D. No. 166, which provides that the rate of interest for the
forbearance of money when secured by a mortgage upon real estate, should not be more than
6% per annum or the maximum rate prescribed by the Monetary Board of the Central Bank of
the Philippines in force at the time the loan was granted. Central Bank Circular No. 783, which
took effect on July 1, 1981, removed the ceiling on interest rates on a certain class of loans, thus:
SECTION 2. The interest rate on a loan forbearance of any money, goods, or credits with a
maturity of more than seven hundred thirty (730) days shall not be subject to any ceiling. 6
In the present case, the term of the subject loan is for a period of 10 years. Considering that its
maturity is more than 730 days, the interest rate is not subject to any ceiling following the above
provision. Therefore, the 24% interest rate agreed upon by parties does not violate the Usury
Law, as amended by P.D. 116.
241
This Court has consistently held that for sometime now, usury has been legally non-inexistent
and that interest can now be charged as lender and borrower may agree upon. 7 As a matter of
fact, Section 1 of Central Bank Circular No. 905 states that:
SECTION 1. The rate of interest, including commissions, premiums, fees and other charges , on
a loan or forbearance of any money, goods, or credits, regardless of maturity and whether
secured or unsecured, that may be charged or collected by any person, whether natural or
judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended. 8
Moreover, in Trade & Investment Development Corporation of the Philippines v. Roblett
Industrial Construction Corporation, 9 this Court has ruled that:
With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to
stipulate the interest to be imposed on monetary obligations. Absent any evidence of fraud,
undue influence, or any vice of consent exercised by one party against the other, the interest
rate agreed upon is binding upon them.
There is no indication in the records that any of the incidents which vitiate consent on the part
of petitioners is present. Indeed, the interest rate agreed upon is binding on them. With respect
to the penalty and service charges, the same are unconscionable or excessive.
Petitioners invoke this Courts rulings in Almeda vs. Court of Appeals 10 and Medel vs. Court of
Appeals 11 to show that the interest rate in the subject promissory note is unconscionable. Their
reliance on these cases is misplaced. In Almeda, what this Court struck down as being
unconscionable and excessive was the unilateral increase in the interest rates from 18% to 68%.
This Court ruled thus:
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract by increasing the interest rates of the loan without
the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by
the Civil Code when it provides, in Article 1956, that "No interest shall be due unless it has been
expressly stipulated in writing." What has been "stipulated in writing" from a perusal of the
interest rate provision of the credit agreement signed between the parties is that petitioners
were bound merely to pay 21% interest x x x.
Petitioners also cannot find refuge in Medel. In this case, what this Court declared as
unconscionable was the imposition of a 66% interest rate per annum. In the instant case, the
interest rate is only 24% per annum, agreed upon by both parties. By no means can it be
considered unconscionable or excessive.1awphi1.net
Verily, petitioners cannot now renege on their obligation to comply with what is incumbent
upon them under the loan agreement. A contract is the law between the parties and they are
bound by its stipulations. 12
Petitioners further contend that during the closure of respondent bank (from January 1, 1985
to July 1, 1994), it lost its function as a banking institution and, therefore, could no longer charge
interests and institute foreclosure proceedings.
In the case of Banco Filipino Savings & Mortgage Bank vs. Monetary Board, Central Bank of the
Philippines, 13 this Court ruled that the banks closure did not diminish the authority and powers
of the designated liquidator to effectuate and carry on the administration of the bank, thus:
x x x. We did not prohibit however acts such as receiving collectibles and receivables or paying
off creditors claims and other transactions pertaining to the normal operations of a bank. There
is no doubt that that the prosecution of suits for collection and the foreclosure of mortgages
against debtors of the bank by the liquidator are among the usual and ordinary transactions
pertaining to the administration of a bank. x x x.
Likewise, in Banco Filipino Savings and Mortgage Bank vs. Ybaez, 14 where one of the issues
was whether respondent bank can collect interest on its loans during its period of liquidation
and closure, this Court held:
In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the validity of the closure and
receivership of Banco Filipino was put in issue. But the pendency of the case did not diminish
the authority of the designated liquidator to administer and continue the banks transactions.
The Court allowed the bank liquidator to continue receiving collectibles and receivables or
paying off creditors claims and other transactions pertaining to normal operations of a bank.
Among these transactions were the prosecution of suits against debtors for collection and for
foreclosure of mortgages. The bank was allowed to collect interests on its loans while under
liquidation, provided that the interests were legal.
In fine, we hold that the interest rate on the loan agreed upon between the parties is not
excessive or unconscionable; and that during the closure of respondent bank, it could still
function as a bonding institution, hence, could continue collecting interests from petitioners.
WHEREFORE, we DENY the petition and AFFIRM the challenged Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 47732. Costs against petitioners.
SO ORDERED.
242
 G.R. No. 158261 December 18, 2006
IN RE: PETITION FOR ASSISTANCE IN THE LIQUIDATION OF THE RURAL BANK OF BOKOD
(BENGUET), INC., PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner,
vs.
BUREAU OF INTERNAL REVENUE, respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the revised Rules of Court, praying
that this Court set aside the Orders, dated 17 January 20032 and 13 May 2003,3 of the Regional
Trial Court (RTC) of La Trinidad, Benguet, sitting as the Liquidation Court of the closed Rural Bank
of Bokod (Benguet), Inc. (RBBI), in Spec. Proc. No. 91-SP-0060.
There is no dispute as to the antecedent facts of the case, recounted as follows:
In 1986, a special examination of RBBI was conducted by the Supervision and Examination Sector
(SES) Department III of what is now the Bangko Sentral ng Pilipinas (BSP),4 wherein various loan
irregularities were uncovered. In a letter, dated 20 May 1986, the SES Department III required
the RBBI management to infuse fresh capital into the bank, within 30 days from date of the
advice, and to correct all the exceptions noted. However, up to the termination of the
subsequent general examination conducted by the SES Department III, no concrete action was
taken by the RBBI management. In view of the irregularities noted and the insolvent condition
of RBBI, the members of the RBBI Board of Directors were called for a conference at the BSP on
4 August 1986. Only one RBBI Director, a certain Mr. Wakit, attended the conference, and the
examination findings and related recommendations were discussed with him. In a letter, dated
4 August 1986, receipt of which was acknowledged by Mr. Wakit, the SES Department III warned
the RBBI Board of Directors that, unless substantial remedial measures are taken to rehabilitate
the bank, it will recommend that the bank be placed under receivership. In a subsequent letter,
dated 17 November 1986, a copy of which was sent to every member of the RBBI Board of
Directors via registered mail, the SES Department III reiterated its warning that it would
recommend the closure of the bank, unless the needed fresh capital was immediately infused.
Despite these notices, the SES Department III received no word from RBBI or from any of its
Directors as of 28 November 1986.5
In a meeting held on 9 January 1987, the Monetary Board of the BSP decided to take the
following action
Rural Bank of Bokod (Benguet), Inc. Report on its examination as of June 16, 1986, its
placement under receivership
ACTION TAKEN
Finding to be true the statements of the Special Assistant to the Governor and Head, Supervision
and Examination Sector (SES) Department III, in her memorandum dated 28 November 1986
submitting a report on the general examination of the Rural Bank of Bokod (Benguet), Inc. as of
16 June 1986, that the financial condition of the rural bank is one of insolvency and its
continuance in business would involve further losses to its depositors and creditors, x x x
xxxx
[T]he Board decided as follows:
a. To forbid the bank to do business in the Philippines and place its assets and affairs under
receivership in accordance with Section 29 of R.A. No. 265, as amended.
b. To designate the Special Assistant to the Governor and Head, SES Department III, as Receiver
of the bank;
c. To refer the cases of irregularities/frauds to the Office of Special Investigation for further
investigation and possible filing of appropriate charges against the following present/former
officers and employees of the bank:
xxxx
d. To include the names of the above-mentioned present and former officers and employees of
the bank in the list of persons barred from employment in any financial institution under the
supervision of the Central Bank without prior clearance from the Central Bank.6
A memorandum and report, dated 28 August 1990, were submitted by the Director of the SES
Department III concluding that the RBBI remained in insolvent financial condition and it can no
longer safely resume business with the depositors, creditors, and the general public. On 7
September 1990, the Monetary Board, after determining and confirming the said memorandum
and report, ordered the liquidation of the bank and designated the Director of the SES
Department III as liquidator.7
243

On 10 April 1991, the designated BSP liquidator of RBBI caused the filing with the RTC of a
Petition for Assistance in the Liquidation of RBBI, docketed as Spec. Proc. No. 91-SP-0060.8
Subsequently, on 2 June 1992, the Monetary Board transferred to herein petitioner Philippine
Deposit Insurance Corporation (PDIC) the receivership/liquidation of RBBI.9
PDIC then filed, on 11 September 2002, a Motion for Approval of Project of Distribution10 of
the assets of RBBI, in accordance with Section 31, in relation to Section 30, of Republic Act No.
7653, otherwise known as the New Central Bank Act. During the hearing held on 17 January
2003, the respondent Bureau of Internal Revenue (BIR), through Atty. Justo Reginaldo,
manifested that PDIC should secure a tax clearance certificate from the appropriate BIR Regional
Office, pursuant to Section 52(C) of Republic Act No. 8424, or the Tax Code of 1997, before it
could proceed with the dissolution of RBBI. On even date, the RTC issued one of the assailed
Orders,11 directing PDIC to comply with Section 52(C) of the Tax Code of 1997 within 30 days
from receipt of a copy of the said order. Pending compliance therewith, the RTC held in
abeyance the Motion for Approval of Project of Distribution. On 13 May 2003, the second
assailed Order12 was issued, in which the RTC, in resolving the Motion for Reconsideration filed
by PDIC, ruled as follows
ORDER
Submitted for resolution is petitioners motion for reconsideration of the order of this court
dated January 17, 2003 holding in abeyance the motion for approval of the project of
distribution pending their compliance with a tax clearance from the Bureau of Internal Revenue.
Petitioner in their motion state that Section 52-C of Republic Act 8424 does not cover closed
banking institutions like the Rural Bank of Bokod as the law that covers liquidation of closed
banks is Section 30 of Republic Act No. 7653 otherwise known as the new Central Bank Law.
Commenting on the motion for reconsideration the Bureau of Internal Revenue states that the
only logic why the Bureau is requesting for a tax clearance is to determine how much taxes, if
there be any, is due the government.
The court believes and so holds that petitioner should still secure the necessary tax clearance in
order for it to be cleared of all its tax liabilities as regardless of what law covers the liquidation
of closed banks, still these banks are subject to payment of taxes mandated by law. Also in its
motion for approval of the project of distribution, paragraph 2, item 2.2 states that there are
unremitted withholding taxes in the amount of P8,767.32.
This shows that indeed there are still taxes to be paid. In order therefore that all taxes due the
government should be paid, petitioner should secure a tax clearance from the Bureau of Internal
Revenue.
Wherefore, based on the foregoing premises, the motion for reconsideration filed by petitioner
is hereby DENIED for lack of merit.13
Hence, PDIC filed the present Petition for Review on Certiorari, under Rule 45 of the revised
Rules of Court, raising pure questions of law. It made a lone assignment of error, alleging that
THE COURT A QUO ERRED IN APPLYING THE PROVISION OF SECTION 52-C OF REPUBLIC ACT NO.
8424 DIRECTING THE SUBMISSION OF TAX CLEARANCE FOR CORPORATIONS CONTEMPLATING
DISSOLUTION ON A BANK ORDERED CLOSED AND PLACED UNDER RECEIVERSHIP AND,
THEREAFTER, UNDER LIQUIDATION, BY THE MONETARY BOARD PURSUANT TO SECTION 30 OF
REPUBLIC ACT NO. 7653.14
PDIC argues that the closure of banks under Section 30 of the New Central Bank Act is summary
in nature and procurement of tax clearance as required under Section 52(C) of the Tax Code of
1997 is not a condition precedent thereto; that under Section 30, in relation to Section 31, of
the New Central Bank Act, asset distribution of a closed bank requires only the approval of the
liquidation court; and that the BIR is not without recourse since, subject to the applicable
provisions of the Tax Code of 1997, it may therefore assess the closed RBBI for tax liabilities, if
any.
In its Comment, the BIR countered with the following arguments: that the present Petition for
Review on Certiorari under Rule 45 of the revised Rules of Court is not the proper remedy to
question the Order, dated 17 January 2003, of the RTC because said order is interlocutory and
cannot be the subject of an appeal; that Section 52(C) of the Tax Code of 1997 applies to all
corporations, including banks ordered closed by the Monetary Board pursuant to Section 30 of
the New Central Bank Act; that the RTC may order the PDIC to obtain a tax clearance before
proceeding to rule on the Motion for Approval of Project of Distribution of the assets of RBBI;
and that the present controversy should not have been elevated to this Court since the parties
are both government agencies who should have administratively settled the dispute.
This Court finds that there are only two primary issues for the resolution of the Petition at bar,
one being procedural, and the other substantive. The procedural issue involves the question of
whether the Petition for Review on Certiorari under Rule 45 of the revised Rules of Court is the
proper remedy from the assailed Orders of the RTC. The substantive issue deals with the
determination of whether a bank ordered closed and placed under receivership by the
244
Monetary Board of the BSP still needs to secure a tax clearance certificate from the BIR before
the liquidation court approves the project of distribution of the assets of the bank.
I
This Court shall first proceed with the procedural issue on the appropriateness of the remedy
taken by PDIC from the assailed RTC Orders.
The differences between an appeal by certiorari under Rule 4515 of the revised Rules of Court
and an original action for certiorari under Rule 6516 of the same Rules have been laid down by
this Court in the case of Atty. Paa v. Court of Appeals,17 to wit
a. In appeal by certiorari, the petition is based on questions of law which the appellant desires
the appellate court to resolve. In certiorari as an original action, the petition raises the issue as
to whether the lower court acted without or in excess of jurisdiction or with grave abuse of
discretion.
b. Certiorari, as a mode of appeal, involves the review of the judgment, award or final order on
the merits. The original action for certiorari may be directed against an interlocutory order of
the court prior to appeal from the judgment or where there is no appeal or any other plain,
speedy or adequate remedy.
c. Appeal by certiorari must be made within the reglementary period for appeal. An original
action for certiorari may be filed not later than sixty (60) days from notice of the judgment, order
or resolution sought to be assailed.
d. Appeal by certiorari stays the judgment, award or order appealed from. An original action for
certiorari, unless a writ of preliminary injunction or a temporary restraining order shall have
been issued, does not stay the challenged proceeding.
e. In appeal by certiorari, the petitioner and respondent are the original parties to the action,
and the lower court or quasi-judicial agency is not to be impleaded. In certiorari as an original
action, the parties are the aggrieved party against the lower court or quasi-judicial agency and
the prevailing parties, who thereby respectively become the petitioner and respondents.
f. In certiorari for purposes of appeal, the prior filing of a motion for reconsideration is not
required (Sec. 1, Rule 45); while in certiorari as an original action, a motion for reconsideration
is a condition precedent (Villa-Rey Transit vs. Bello, L-18957, April 23, 1963), subject to certain
exceptions.
g. In appeal by certiorari, the appellate court is in the exercise of its appellate jurisdiction and
power of review, while in certiorari as an original action, the higher court exercises original
jurisdiction under its power of control and supervision over the proccedings of lower courts.
Guided by the foregoing distinctions, this Court, in perusing the assailed RTC Orders, dated 17
January 2003 and 13 May 2003, reaches the conclusion that these are merely interlocutory in
nature and are not the proper subjects of an appeal by certiorari under Rule 45 of the revised
Rules of Court.
This Court has repeatedly and uniformly held that a judgment or order may be appealed only
when it is final, meaning that it completely disposes of the case and definitively adjudicates the
respective rights of the parties, leaving thereafter no substantial proceeding to be had in
connection with the case except the proper execution of the judgment or order. Conversely, an
interlocutory order or judgment is not appealable for it does not decide the action with finality
and leaves substantial proceedings still to be had.18
The RTC Orders presently questioned before this Court has not disposed of the case nor has it
adjudicated definitively the rights of the parties in Spec. Proc. No. 91-SP-0060. They only held in
abeyance the approval of the Project of Distribution of the assets of RBBI until PDIC, as
liquidator, acquires a tax clearance from the BIR. Indubitably, there are still substantial
proceedings to be had after PDIC presents the required tax clearance to the trial court, since the
Project of Distribution of assets still has to be finalized and approved.
PDIC avers that the RTC Orders of 17 January 2003 and 13 May 2003 are final because, as this
Court pronounced in the case of Pacific Banking Corporation Employees Organization (PaBCEO)
v. Court of Appeals,19 an order of the liquidation court allowing or disallowing a claim is a final
order and may be the subject of an appeal. It further asserts that the legal issue of whether RBBI
should secure a tax clearance is a "disputed claim," which was already allowed by the RTC in its
assailed Orders, thus, making the latter final.
This Court is unconvinced. The foregoing arguments of PDIC result from a strained interpretation
of law and jurisprudence, and are raised in an apparent attempt to justify a very obvious faux
pas on its part. While it is true that in liquidation proceedings, the settlement of disputed or
contentious claims may require a full-dress hearing and the resolution of legal issues,20 it does
not follow that all legal issues resolved in the course of the liquidation proceedings would
automatically be tantamount to an allowance or disallowance of a disputed or contentious
claim. In Spec. Proc. No. 91-SP-0060 pending before the RTC, there can be no doubt that the
claim of the BIR against RBBI consists of the unpaid tax liabilities of the latter. The BIR contends
that it could only determine the existence and correct amount of the tax liabilities of RBBI if
PDIC, as liquidator of the bank, secures a tax clearance from the appropriate BIR Regional Office.
245
The acquirement of a tax clearance is not the claim of the BIR against RBBI, it is only the means
by which to ascertain such claim. Whatever tax liabilities the BIR may claim against RBBI can still
be disputed before the RTC by the PDIC, as liquidator of the bank, whether as to the existence
or computation of the said tax liabilities, and it is the ruling of the RTC on such matters that may
constitute a final order which definitively settles the claim of the BIR. The mere grant by the RTC
of the motion requiring PDIC, as liquidator of RBBI, to secure a tax clearance, does not yet
constitute an adjudication of the claim of the BIR. Hence, the assailed RTC Orders, dated 17
January 2003 and 13 May 2003, are clearly interlocutory in nature.
As a general rule, an interlocutory order is not appealable until after the rendition of the
judgment on the merits, given that a contrary rule would delay the administration of justice and
unduly burden the courts. This Court, however, has also held that an original action for certiorari
under Rule 65 of the revised Rules of Court is an appropriate remedy to assail an interlocutory
order when (1) the tribunal issued such order without or in excess of jurisdiction or with grave
abuse of discretion, and (2) the assailed interlocutory order is patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief.21 Thus, despite this Courts
finding that PDIC, as the liquidator of RBBI, availed itself of the wrong remedy by filing an appeal
by certiorari under Rule 45 of the revised Rules of Court, We shall adopt a positive and pragmatic
approach, and, instead of dismissing the instant Petition outright, it shall treat the same as an
original action for certiorari under Rule 65 of the same Rules, in consideration of the crucial
issues and substantial arguments already presented by the concerned parties before this
Court.22
II
Having disposed of the procedural issue, this Court now addresses the substantive issue of
whether RBBI, as represented by its liquidator, PDIC, still needs to secure a tax clearance from
the BIR before the RTC could approve the Project of Distribution of the assets of RBBI.
The BIR anchors its position that a tax clearance is necessary on Section 52(C) of the Tax Code
of 1997, which provides
SEC. 52. Corporation Returns.
xxxx
(C) Return of Corporation Contemplating Dissolution or Reorganization. Every corporation
shall, within thirty days (30) after the adoption by the corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization, render a correct return to the Commissioner,
verified under oath, setting forth the terms of such resolution or plan and such other
information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by
rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and
Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which
certificate shall be submitted to the Securities and Exchange Commission.
To implement the foregoing provision, the BIR still relies on the regulations it jointly issued with
the Securities and Exchange Commission (SEC) in 1985, when the Tax Code of 1977 was still in
effect and a similar provision could be found in Section 46(C) thereof. The full text of the
regulations is reproduced below
BIR-SEC REGULATIONS NO. 1
SUBJECT: Regulations to Implement the Provisions of Executive Order No. 1026, Amending
Section 46(c) of the National Internal Revenue Code of 1977, as amended, Requiring Dissolving
Corporations to File Information Returns and Secure Tax Clearance from the Commissioner of
Internal Revenue, and Providing Adequate Penalties for Violations Thereof.
TO: All Internal Revenue Officers and Others Concerned.
Pursuant to the provisions of Section 277, in relation to Section 4 of the National Revenue Code
of 1977, as amended, the following regulations are hereby promulgated.
Section 1. Scope. These regulations shall govern the procedure for the issuance of tax
clearance certificates to dissolving corporations. This shall include corporations intending to
dissolve or liquidate the whole or any part of its capital stocks, as well as, corporations which
have been notified of possible involuntary dissolution by the Securities and Exchange
Commission.
Section 2. Requirements in case of dissolution. a) Every Corporation shall, within thirty (30)
days after
- the adoption by the corporation of a resolution or plan for the dissolution of the corporation,
or for the liquidation of the whole or any part of its capital stock, or
246
- the receipt of an order of suspension by the Securities and Exchange Commission in case of
involuntary dissolution,
file their income tax returns covering the income earned by them from the beginning of the
taxable year up to date of such dissolution.
In addition thereto, they shall submit within the same period and verified under oath, the
following documents:
1. a copy of the articles of incorporation and by-laws;
2. a copy of the resolution authorizing dissolution; and
3. balance sheet as of the date of dissolution and a profit and loss statement covering the period
from the beginning of the taxable year to the date of dissolution.
b) The Securities and Exchange Commission whenever it issues an order of involuntary
dissolution or suspension of the primary franchise or certificate of registration of a corporation,
shall at the same time furnish the Commissioner of Internal Revenue a copy of such order.
Section 3. Tax clearance certificate. a) Within thirty (30) days from receipt of the documents
mentioned in the preceding Section, the Commissioner of Internal Revenue, or his duly
authorized representative, shall issue the corresponding tax clearance certificate (BIR Form No.
17.61) for the corporation which will be dissolved.
b) The Securities and Exchange Commission shall issue the final order of dissolution only after a
certificate of tax clearance has been submitted by the dissolving corporation: Provided, that in
case of involuntary dissolution, the Securities and Exchange Commission may nevertheless
proceed with the dissolution if thirty (30) days after receipt of the suspension order no tax
clearance has yet been issued.
Section 4. Penalty. Failure to render the return and secure the certificate of tax clearance as
above-mentioned shall subject the officer(s) of the corporation required by law to file the return
under Section 46(a) of the National Internal Revenue Code of 1977, as amended, to a fine of not
less than P5,000.00 or imprisonment of not less than two (2) years, and shall make them liable
for all outstanding or unpaid tax liabilities of the dissolving corporation.
Section 5. Effectivity. These regulations shall apply to all corporate dissolution taking place on
or after May 14, 1985.
Section 6. Repealing Clause. All revenue regulations, orders and circulars which are
inconsistent herewith are hereby modified accordingly.
The afore-quoted Tax Code provision and regulations refer to a voluntary dissolution and/or
liquidation of a corporation through its adoption of a resolution or plan to that effect, or an
involuntary dissolution of a corporation by order of the SEC. They make no reference at all to a
situation similar to the one at bar in which a banking corporation is ordered closed and placed
under receivership by the BSP and its assets judicially liquidated. Now, the determining question
is, whether Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1 could be made
to apply to the present case.
This Court rules in the negative.
First, Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the
relations only as between the SEC and the BIR, making a certificate of tax clearance a prior
requirement before the SEC could approve the dissolution of a corporation. In Spec. Proc. No.
91-SP-0060 pending before the RTC, RBBI was placed under receivership and ordered liquidated
by the BSP, not the SEC; and the SEC is not even a party in the said case, although the BIR is. This
Court cannot find any basis to extend the SEC requirements for dissolution of a corporation to
the liquidation proceedings of RBBI before the RTC when the SEC is not even involved therein.
It is conceded that the SEC has the authority to order the dissolution of a corporation pursuant
to Section 121 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the
Philippines, which reads
Sec. 121. Involuntary dissolution. A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and regulations.
The Corporation Code, however, is a general law applying to all types of corporations, while the
New Central Bank Act regulates specifically banks and other financial institutions, including the
dissolution and liquidation thereof. As between a general and special law, the latter shall prevail
generalia specialibus non derogant.23
The liquidation of RBBI is undertaken according to Sections 30 of the New Central Bank Act, viz
Sec. 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of
the supervising or examining department, the Monetary Board finds that a bank or quasi-bank:
247
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided,
That this shall not include inability to pay caused by extraordinary demands induced by financial
panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities;
or
(c) cannot continue in business without involving probable losses to its depositors or creditors;
or
(d) has wilfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in banking or finance may be designated
as receiver.
The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the transfer or disposition of any asset of
the institution: Provided, That the receiver may deposit or place the funds of the institution in
non-speculative investments. The receiver shall determine as soon as possible, but not later
than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise
placed in such a condition that it may be permitted to resume business with safety to its
depositors and creditors and the general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior approval of the Monetary
Board.
If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application
to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice,
adjudicate disputed claims against the institution, assist the enforcement of individual liabilities
of the stockholders, directors and officers, and decide on other issues as may be material to
implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from
the assets of the institution.
(2) convert the assets of the institution to money, dispose of the same to creditors and other
parties, for the purpose of paying the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the Philippines and he may, in the
name of the institution, and with the assistance of counsel as he may retain, institute such
actions as may be necessary to collect and recover accounts and assets of, or defend any action
against, the institution. The assets of an institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver and shall, from the moment the institution
was placed under such receivership or liquidation, be exempt from any order of garnishment,
levy, attachment, or execution.
The actions of the Monetary Board taken under this section or under Section 29 of this Act shall
be final and executory, and may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may
only be filed by the stockholders of record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the institution of the order directing
receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a receiver
under this section shall be vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the designation of a receiver.
Section 30 of the New Central Bank Act lays down the proceedings for receivership and
liquidation of a bank. The said provision is silent as regards the securing of a tax clearance from
the BIR. The omission, nonetheless, cannot compel this Court to apply by analogy the tax
clearance requirement of the SEC, as stated in Section 52(C) of the Tax Code of 1997 and BIR-
SEC Regulations No. 1, since, again, the dissolution of a corporation by the SEC is a totally
different proceeding from the receivership and liquidation of a bank by the BSP. This Court
cannot simply replace any reference by Section 52(C) of the Tax Code of 1997 and the provisions
of the BIR-SEC Regulations No. 1 to the "SEC" with the "BSP." To do so would be to read into the
law and the regulations something that is simply not there, and would be tantamount to judicial
legislation.
248
It should be noted that there are substantial differences in the procedure for involuntary
dissolution and liquidation of a corporation under the Corporation Code, and that of a banking
corporation under the New Central Bank Act, so that the requirements in one cannot simply be
imposed in the other.
Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of a verified
complaint and after proper notice and hearing, on grounds provided by existing laws, rules, and
regulations.24 Upon receipt by the corporation of the order of suspension from the SEC, it is
required to notify and submit a copy of the said order, together with its final tax return, to the
BIR. The SEC is also required to furnish the BIR a copy of its order of suspension. The BIR is
supposed to issue a tax clearance to the corporation within 30 days from receipt of the foregoing
documentary requirements. The SEC shall issue the final order of dissolution only after the
corporation has submitted its tax clearance; or in case of involuntary dissolution, the SEC may
proceed with the dissolution after 30 days from receipt by the BIR of the documentary
requirements without a tax clearance having been issued.25 The corporation is allowed to
continue as a body corporate for three years after its dissolution, for the purpose of prosecuting
and defending suits by or against it, to settle and close its affairs, and to dispose of and convey
its property and distribute its assets, but not for the purpose of continuing its business. The
corporation may undertake its own liquidation, or at any time during the said three years, it may
convey all of its property to trustees for the benefit of its stockholders, members, creditors, and
other persons in interest.26
In contrast, the Monetary Board may summarily and without need for prior hearing, forbid the
banking corporation from doing business in the Philippines, for causes enumerated in Section
30 of the New Central Bank Act; and appoint the PDIC as receiver of the bank. PDIC shall
immediately gather and take charge of all the assets and liabilities of the closed bank and
administer the same for the benefit of its creditors. The summary nature of the procedure for
the involuntary closure of a bank is especially stressed in Section 30 of the New Central Bank
Act, which explicitly states that the actions of the Monetary Board under the said Section or
Section 29 shall be final and executory, and may not be restrained or set aside by the court
except on a Petition for Certiorari filed by the stockholders of record of the bank representing a
majority of the capital stock. PDIC, as the appointed receiver, shall file ex parte with the proper
RTC, and without requirement of prior notice or any other action, a petition for assistance in the
liquidation of the bank. The bank is not given the option to undertake its own liquidation.
Second, the alleged purpose of the BIR in requiring the liquidator PDIC to secure a tax clearance
is to enable it to determine the tax liabilities of the closed bank. It raised the point that since the
PDIC, as receiver and liquidator, failed to file the final return of RBBI for the year its operations
were stopped, the BIR had no way of determining whether the bank still had outstanding tax
liabilities.
To our mind, what the BIR should have requested from the RTC, and what was within the
discretion of the RTC to grant, is not an order for PDIC, as liquidator of RBBI, to secure a tax
clearance; but, rather, for it to submit the final return of RBBI. The first paragraph of Section
30(C) of the Tax Code of 1997, read in conjunction with Section 54 of the same Code, clearly
imposes upon PDIC, as the receiver and liquidator of RBBI, the duty to file such a return. The
pertinent provisions are reproduced below for reference
SEC. 52. Corporation Returns.
xxxx
(C) Return of Corporation Contemplating Dissolution or Reorganization. Every corporation
shall, within thirty days (30) after the adoption by the corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization, render a correct return to the Commissioner,
verified under oath, setting forth the terms of such resolution or plan and such other
information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by
rules and regulations, prescribe.
xxxx
SEC. 54. Returns of receivers, Trustees in Bankruptcy or Assignees. In cases wherein receivers,
trustees in bankruptcy or assignees are operating the property or business of a corporation,
subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns
of net income as and for such corporation, in the same manner and form as such an organization
is hereinbefore required to make returns, and any tax due on the income as returned by
receivers, trustees or assignees shall be assessed and collected in the same manner as if
assessed directly against the organizations of whose businesses or properties they have custody
or control.
Section 54 of the Tax Code of 1997 imposes a general duty on all receivers, trustees in
bankruptcy, and assignees, who operate and preserve the assets of a corporation, regardless of
the circumstances or the law by which they came to hold their positions, to file the necessary
returns on behalf of the corporation under their care.
The filing by PDIC of a final tax return, on behalf of RBBI, should already address the supposed
concern of the BIR and would already enable the latter to determine if RBBI still had outstanding
tax liabilities.
The unreasonableness and impossibility of requiring a tax clearance before the approval by the
RTC of the Project of Distribution of the assets of the RBBI becomes apparent when the timeline
of the proceedings is considered.
249

The BIR can only issue a certificate of tax clearance when the taxpayer had completely paid off
his tax liabilities. The certificate of tax clearance attests that the taxpayer no longer has any
outstanding tax obligations to the Government.
Should the BIR find that RBBI still had outstanding tax liabilities, PDIC will not be able to pay the
same because the Project of Distribution of the assets of RBBI remains unapproved by the RTC;
and, if RBBI still had outstanding tax liabilities, the BIR will not issue a tax clearance; but, without
the tax clearance, the Project of Distribution of assets, which allocates the payment for the tax
liabilities, will not be approved by the RTC. It will be a chicken-and-egg dilemma.
The Government, in this case, cannot generally claim preference of credit, and receive payment
ahead of the other creditors of RBBI. Duties, taxes, and fees due the Government enjoy priority
only when they are with reference to a specific movable property, under Article 2241(1) of the
Civil Code, or immovable property, under Article 2242(1) of the same Code. However, with
reference to the other real and personal property of the debtor, sometimes referred to as "free
property," the taxes and assessments due the National Government, other than those in Articles
2241(1) and 2242(1) of the Civil Code, will come only in ninth place in the order of preference.27
Thus, the recourse of the BIR, after assessing the final return and examining all other pertinent
documents of RBBI, and making a determination of the latters outstanding tax liabilities, is to
present its claim, on behalf of the National Government, before the RTC during the liquidation
proceedings. The BIR is expected to prove and substantiate its claim, in the same manner as the
other creditors. It is only after the RTC allows the claim of the BIR, together with the claims of
the other creditors, can a Project for Distribution of the assets of RBBI be finalized and approved.
PDIC, then, as liquidator, may proceed with the disposition of the assets of RBBI and pay the
latters financial obligations, including its outstanding tax liabilities. And, finally, only after such
payment, can the BIR issue a certificate of tax clearance in the name of RBBI.
Third, the evident void in current statutes and regulations as to the relations among the BIR, as
tax collector of the National Government; the BSP, as regulator of the banks; and the PDIC, as
the receiver and liquidator of banks ordered closed by the BSP, is not for this Court to fill in. It is
up to the legislature to address the matter through appropriate legislation, and to the executive
to provide the regulations for its implementation.
It is for these reasons that the RTC committed grave abuse of discretion, and committed patent
error, in ordering the PDIC, as the liquidator of RBBI, to first secure a tax clearance from the
appropriate BIR Regional Office, and holding in abeyance the approval of the Project of
Distribution of the assets of the RBBI by virtue thereof.
Although this Court rules in favor of PDIC, in the sense that a tax clearance is not a prerequisite
to the approval of the Project of Distribution of the assets of RBBI, it cannot uphold its argument
that the Spec. Proc. No. 91-SP-0060 is summary in nature.
Section 30(d) of the New Central Bank Act gives the Monetary Board of the BSP the power to,
summarily and without need for prior hearing, forbid a bank or quasi-bank from doing business
in the Philippines and designating the PDIC as receiver of the banking institution. It bears to
emphasize that: (1) the power is granted to the Monetary Board of the BSP; and (2) what is
summary in nature is the power of the Monetary Board of the BSP to forbid or stop a bank or
quasi-bank from doing further business.
Once liquidation proceedings are instituted before the appropriate trial court, and the trial court
assumes jurisdiction over the Petition, then the proceedings take a different character. Spec.
Proc. No. 91-SP-0600 is the liquidation proceedings initiated by the PDIC before the RTC.
Liquidation proceedings have been described in detail in the case of Pacific Banking Corporation
Employees Organization (PaBCEO) v. Court of Appeals,28 to wit
[A] liquidation proceeding resembles the proceeding for the settlement of estate of deceased
persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose: the
determination of all the assets and the payment of all the debts and liabilities of the insolvent
corporation or the estate. The Liquidator and the administrator or executor are both charged
with the assets for the benefit of the claimants. In both instances, the liability of the corporation
and the estate is not disputed. The court's concern is with the declaration of creditors and their
rights and the determination of their order of payment
xxxx
A liquidation proceeding is a single proceeding which consists of a number of cases properly
classified as "claims." It is basically a two-phased proceeding. The first phase is concerned with
the approval and disapproval of claims. Upon the approval of the petition seeking the assistance
of the proper court in the liquidation of a closed entity, all money claims against the bank are
required to be filed with the liquidation court. This phase may end with the declaration by the
liquidation court that the claim is not proper or without basis. On the other hand, it may also
end with the liquidation court allowing the claim. In the latter case, the claim shall be classified
whether it is ordinary or preferred, and thereafter included Liquidator. In either case, the order
allowing or disallowing a particular claim is final order, and may be appealed by the party
aggrieved thereby.
The second phase involves the approval by the Court of the distribution plan prepared by the
duly appointed liquidator. The distribution plan specifies in detail the total amount available for
250
distribution to creditors whose claim were earlier allowed. The Order finally disposes of the issue
of how much property is available for disposal. Moreover, it ushers in the final phase of the
liquidation proceeding - payment of all allowed claims in accordance with the order of legal
priority and the approved distribution plan.
xxxx
A liquidation proceeding is commenced by the filing of a single petition by the Solicitor General
with a court of competent jurisdiction entitled, "Petition for Assistance in the Liquidation of e.g.,
Pacific Banking Corporation." All claims against the insolvent are required to be filed with the
liquidation court. Although the claims are litigated in the same proceeding, the treatment is
individual. Each claim is heard separately. And the Order issued relative to a particular claim
applies only to said claim, leaving the other claims unaffected, as each claim is considered
separate and distinct from the others. x x x [Emphases supplied.]
Irrefragably, liquidation proceedings cannot be summary in nature. It requires the holding of
hearings and presentation of evidence of the parties concerned, i.e., creditors who must prove
and substantiate their claims, and the liquidator disputing the same. It also allows for multiple
appeals, so that each creditor may appeal a final order rendered against its claim. Hence,
liquidation proceedings may very well be highly-contested and drawn-out, because, at the end
of it all, all claims against the corporation undergoing litigation must be settled definitively and
its assets properly disposed off.
WHEREFORE, in view of the foregoing, this Court rules as follows
(a) The instant Petition is GRANTED and the Orders, dated 17 January 2003 and 13 May 2003, of
the RTC, sitting as the Liquidation Court of the closed RBBI, in Spec. Proc. No. 91-SP-0060, are
NULLIFIED and SET ASIDE for having been rendered with grave abuse of discretion;
(b) The PDIC, as liquidator, is ORDERED to submit to the BIR the final tax return of RBBI, in
accordance with the first paragraph of Section 52(C), in connection with Section 54, of the Tax
Code of 1997; and
(c) The RTC is ORDERED to resume the liquidation proceedings in Spec. Proc. No. 91-SP-0060 in
order to determine all the claims of the creditors, including that of the National Government, as
determined and presented by the BIR; and, pursuant to such determination, and guided
accordingly by the provisions of the Civil Code on preference of credit, to review and approve
the Project of Distribution of the assets of RBBI.
SO ORDERED.
G.R. No. 115849 January 24, 1996
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines) and
MERCURIO RIVERA, petitioners,
vs.
COURT OF APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA, and JOSE
JANOLO, respondents.
DECISION
PANGANIBAN, J.:
In the absence of a formal deed of sale, may commitments given by bank officers in an exchange
of letters and/or in a meeting with the buyers constitute a perfected and enforceable contract
of sale over 101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of "apparent authority"
apply in this case? If so, may the Central Bank-appointed conservator of Producers Bank (now
First Philippine International Bank) repudiate such "apparent authority" after said contract has
been deemed perfected? During the pendency of a suit for specific performance, does the filing
of a "derivative suit" by the majority shareholders and directors of the distressed bank to
prevent the enforcement or implementation of the sale violate the ban against forum-shopping?
Simply stated, these are the major questions brought before this Court in the instant Petition
for review on certiorari under Rule 45 of the Rules of Court, to set aside the Decision
promulgated January 14, 1994 of the respondent Court of Appeals1 in CA-G.R CV No. 35756 and
the Resolution promulgated June 14, 1994 denying the motion for reconsideration. The
dispositive portion of the said Decision reads:
WHEREFORE, the decision of the lower court is MODIFIED by the elimination of the damages
awarded under paragraphs 3, 4 and 6 of its dispositive portion and the reduction of the award
in paragraph 5 thereof to P75,000.00, to be assessed against defendant bank. In all other
aspects, said decision is hereby AFFIRMED.
All references to the original plaintiffs in the decision and its dispositive portion are deemed,
herein and hereafter, to legally refer to the plaintiff-appellee Carlos C. Ejercito.
Costs against appellant bank.
The dispositive portion of the trial court's2 decision dated July 10, 1991, on the other hand, is
as follows:
251
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants as follows:
1. Declaring the existence of a perfected contract to buy and sell over the six (6) parcels of
land situated at Don Jose, Sta. Rosa, Laguna with an area of 101 hectares, more or less, covered
by and embraced in Transfer Certificates of Title Nos. T-106932 to T-106937, inclusive, of the
Land Records of Laguna, between the plaintiffs as buyers and the defendant Producers Bank for
an agreed price of Five and One Half Million (P5,500,000.00) Pesos;
2. Ordering defendant Producers Bank of the Philippines, upon finality of this decision and
receipt from the plaintiffs the amount of P5.5 Million, to execute in favor of said plaintiffs a deed
of absolute sale over the aforementioned six (6) parcels of land, and to immediately deliver to
the plaintiffs the owner's copies of T.C.T. Nos. T-106932 to T- 106937, inclusive, for purposes of
registration of the same deed and transfer of the six (6) titles in the names of the plaintiffs;
3. Ordering the defendants, jointly and severally, to pay plaintiffs Jose A. Janolo and
Demetrio Demetria the sums of P200,000.00 each in moral damages;
4. Ordering the defendants, jointly and severally, to pay plaintiffs the sum of P100,000.00
as exemplary damages ;
5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of
P400,000.00 for and by way of attorney's fees;
6. Ordering the defendants to pay the plaintiffs, jointly and severally, actual and moderate
damages in the amount of P20,000.00;
With costs against the defendants.
After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to sur-rejoinder,
the petition was given due course in a Resolution dated January 18, 1995. Thence, the parties
filed their respective memoranda and reply memoranda. The First Division transferred this case
to the Third Division per resolution dated October 23, 1995. After carefully deliberating on the
aforesaid submissions, the Court assigned the case to the undersigned ponente for the writing
of this Decision.
The Parties
Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines;
petitioner Bank, for brevity) is a banking institution organized and existing under the laws of the
Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal
age and was, at all times material to this case, Head-Manager of the Property Management
Department of the petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee
of original plaintiffs-appellees Demetrio Demetria and Jose Janolo.
Respondent Court of Appeals is the court which issued the Decision and Resolution sought to
be set aside through this petition.
The Facts
The facts of this case are summarized in the respondent Court's Decision3 as follows:
(1) In the course of its banking operations, the defendant Producer Bank of the Philippines
acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rose,
Laguna, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The property
used to be owned by BYME Investment and Development Corporation which had them
mortgaged with the bank as collateral for a loan. The original plaintiffs, Demetrio Demetria and
Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that
purpose.
(2) In the early part of August 1987 said plaintiffs, upon the suggestion of BYME
investment's legal counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of the
Property Management Department of the defendant bank. The meeting was held pursuant to
plaintiffs' plan to buy the property (TSN of Jan. 16, 1990, pp. 7-10). After the meeting, plaintiff
Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank
through a letter dated August 30, 1987 (Exh. "B"), as follows:
August 30, 1987
The Producers Bank of the Philippines
Makati, Metro Manila
Attn. Mr. Mercurio Q. Rivera
Manager, Property Management Dept.
Gentleman:
I have the honor to submit my formal offer to purchase your properties covered by titles listed
hereunder located at Sta. Rosa, Laguna, with a total area of 101 hectares, more or less.
TCT NO.
AREA
252
 (4) On September 17, 1987, plaintiff Janolo, responding to Rivera's aforequoted reply,
T-106932 wrote (Exh. "D"):
113,580 sq. m.
T-106933 September 17, 1987
70,899 sq. m.
T-106934 Producers Bank
52,246 sq. m. Paseo de Roxas
T-106935 Makati, Metro Manila
96,768 sq. m.
T-106936 Attention: Mr. Mercurio Rivera
187,114 sq. m.
T-106937 Gentlemen:
481,481 sq. m.
In reply to your letter regarding my proposal to purchase your 101-hectare lot located at Sta.
My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00) PESOS, in Rosa, Laguna, I would like to amend my previous offer and I now propose to buy the said lot at
cash. P4.250 million in CASH..

Kindly contact me at Telephone Number 921-1344. Hoping that this proposal meets your satisfaction.

(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by letter (5) There was no reply to Janolo's foregoing letter of September 17, 1987. What took place
which is hereunder quoted (Exh. "C"): was a meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-
President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting.
September 1, 1987 Two days later, or on September 30, 1987, plaintiff Janolo sent to the bank, through Rivera, the
following letter (Exh. "E"):
JP M-P GUTIERREZ ENTERPRISES
142 Charisma St., Doa Andres II The Producers Bank of the Philippines
Rosario, Pasig, Metro Manila Paseo de Roxas, Makati
Metro Manila
Attention: JOSE O. JANOLO
Attention: Mr. Mercurio Rivera
Dear Sir:
Re: 101 Hectares of Land
Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, Laguna in Sta. Rosa, Laguna
(formerly owned by Byme Industrial Corp.). Please be informed however that the bank's
counter-offer is at P5.5 million for more than 101 hectares on lot basis. Gentlemen:

We shall be very glad to hear your position on the on the matter. Pursuant to our discussion last 28 September 1987, we are pleased to inform you that we are
accepting your offer for us to purchase the property at Sta. Rosa, Laguna, formerly owned by
Best regards. Byme Investment, for a total price of PESOS: FIVE MILLION FIVE HUNDRED THOUSAND
(P5,500,000.00).

253

Thank you.
(6) On October 12, 1987, the conservator of the bank (which has been placed under
conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator in the
person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote
plaintiff Demetria the following letter (Exh. "F"):
Attention: Atty. Demetrio Demetria
Dear Sir:
Your proposal to buy the properties the bank foreclosed from Byme investment Corp. located
at Sta. Rosa, Laguna is under study yet as of this time by the newly created committee for
submission to the newly designated Acting Conservator of the bank.
For your information.
(7) What thereafter transpired was a series of demands by the plaintiffs for compliance by
the bank with what plaintiff considered as a perfected contract of sale, which demands were in
one form or another refused by the bank. As detailed by the trial court in its decision, on
November 17, 1987, plaintiffs through a letter to defendant Rivera (Exhibit "G") tendered
payment of the amount of P5.5 million "pursuant to (our) perfected sale agreement."
Defendants refused to receive both the payment and the letter. Instead, the parcels of land
involved in the transaction were advertised by the bank for sale to any interested buyer (Exh,
"H" and "H-1"). Plaintiffs demanded the execution by the bank of the documents on what was
considered as a "perfected agreement." Thus:
Mr. Mercurio Rivera
Manager, Producers Bank
Paseo de Roxas, Makati
Metro Manila
Dear Mr. Rivera:
This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your 101-
hectare lot located in Sta. Rosa, Laguna, and which are covered by TCT No. T-106932 to 106937.
From the documents at hand, it appears that your counter-offer dated September 1, 1987 of
this same lot in the amount of P5.5 million was accepted by our client thru a letter dated
September 30, 1987 and was received by you on October 5, 1987.
In view of the above circumstances, we believe that an agreement has been perfected. We were
also informed that despite repeated follow-up to consummate the purchase, you now refuse to
honor your commitment. Instead, you have advertised for sale the same lot to others.
In behalf of our client, therefore, we are making this formal demand upon you to consummate
and execute the necessary actions/documentation within three (3) days from your receipt
hereof. We are ready to remit the agreed amount of P5.5 million at your advice. Otherwise, we
shall be constrained to file the necessary court action to protect the interest of our client.
We trust that you will be guided accordingly.
(8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing
letter and stated, in its communication of December 2, 1987 (Exh. "I"), that said letter has been
"referred . . . to the office of our Conservator for proper disposition" However, no response
came from the Acting Conservator. On December 14, 1987, the plaintiffs made a second tender
of payment (Exh. "L" and "L-1"), this time through the Acting Conservator, defendant
Encarnacion. Plaintiffs' letter reads:
PRODUCERS BANK OF
THE PHILIPPINES
Paseo de Roxas,
Makati, Metro Manila
Attn.: Atty. NIDA ENCARNACION
Central Bank Conservator
We are sending you herewith, in - behalf of our client, Mr. JOSE O. JANOLO, MBTC Check No.
258387 in the amount of P5.5 million as our agreed purchase price of the 101-hectare lot
covered by TCT Nos. 106932, 106933, 106934, 106935, 106936 and 106937 and registered
under Producers Bank.
This is in connection with the perfected agreement consequent from your offer of P5.5 Million
as the purchase price of the said lots. Please inform us of the date of documentation of the sale
immediately.
Kindly acknowledge receipt of our payment.
254

(9) The foregoing letter drew no response for more than four months. Then, on May 3,
1988, plaintiff, through counsel, made a final demand for compliance by the bank with its
obligations under the considered perfected contract of sale (Exhibit "N"). As recounted by the
trial court (Original Record, p. 656), in a reply letter dated May 12, 1988 (Annex "4" of
defendant's answer to amended complaint), the defendants through Acting Conservator
Encarnacion repudiated the authority of defendant Rivera and claimed that his dealings with the
plaintiffs, particularly his counter-offer of P5.5 Million are unauthorized or illegal. On that basis,
the defendants justified the refusal of the tenders of payment and the non-compliance with the
obligations under what the plaintiffs considered to be a perfected contract of sale.
(10) On May 16, 1988, plaintiffs filed a suit for specific performance with damages against
the bank, its Manager Rivers and Acting Conservator Encarnacion. The basis of the suit was that
the transaction had with the bank resulted in a perfected contract of sale, The defendants took
the position that there was no such perfected sale because the defendant Rivera is not
authorized to sell the property, and that there was no meeting of the minds as to the price.
On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar
Hernandez and Gatmaitan, filed a motion to intervene in the trial court, alleging that as owner
of 80% of the Bank's outstanding shares of stock, he had a substantial interest in resisting the
complaint. On July 8, 1991, the trial court issued an order denying the motion to intervene on
the ground that it was filed after trial had already been concluded. It also denied a motion for
reconsideration filed thereafter. From the trial court's decision, the Bank, petitioner Rivera and
conservator Encarnacion appealed to the Court of Appeals which subsequently affirmed with
modification the said judgment. Henry Co did not appeal the denial of his motion for
intervention.
In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place
of Demetria and Janolo, in view of the assignment of the latters' rights in the matter in litigation
to said private respondent.
On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and
several other stockholders of the Bank, through counsel Angara Abello Concepcion Regala and
Cruz, filed an action (hereafter, the "Second Case") purportedly a "derivative suit" with the
Regional Trial Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against
Encarnacion, Demetria and Janolo "to declare any perfected sale of the property as
unenforceable and to stop Ejercito from enforcing or implementing the sale"4 In his answer,
Janolo argued that the Second Case was barred by litis pendentia by virtue of the case then
pending in the Court of Appeals. During the pre-trial conference in the Second Case, plaintiffs
filed a Motion for Leave of Court to Dismiss the Case Without Prejudice. "Private respondent
opposed this motion on the ground, among others, that plaintiff's act of forum shopping justifies
the dismissal of both cases, with prejudice."5 Private respondent, in his memorandum, averred
that this motion is still pending in the Makati RTC.
In their Petition6 and Memorandum7 , petitioners summarized their position as follows:
I.
The Court of Appeals erred in declaring that a contract of sale was perfected between Ejercito
(in substitution of Demetria and Janolo) and the bank.
II.
The Court of Appeals erred in declaring the existence of an enforceable contract of sale between
the parties.
III.
The Court of Appeals erred in declaring that the conservator does not have the power to
overrule or revoke acts of previous management.
IV.
The findings and conclusions of the Court of Appeals do not conform to the evidence on record.
On the other hand, petitioners prayed for dismissal of the instant suit on the ground8 that:
I.
Petitioners have engaged in forum shopping.
II.
The factual findings and conclusions of the Court of Appeals are supported by the evidence on
record and may no longer be questioned in this case.
III.
The Court of Appeals correctly held that there was a perfected contract between Demetria and
Janolo (substituted by; respondent Ejercito) and the bank.
IV.
The Court of Appeals has correctly held that the conservator, apart from being estopped from
repudiating the agency and the contract, has no authority to revoke the contract of sale.
The Issues

255
From the foregoing positions of the parties, the issues in this case may be summed up as follows:
1) Was there forum-shopping on the part of petitioner Bank?
2) Was there a perfected contract of sale between the parties?
3) Assuming there was, was the said contract enforceable under the statute of frauds?
4) Did the bank conservator have the unilateral power to repudiate the authority of the
bank officers and/or to revoke the said contract?
5) Did the respondent Court commit any reversible error in its findings of facts?
The First Issue: Was There Forum-Shopping?
In order to prevent the vexations of multiple petitions and actions, the Supreme Court
promulgated Revised Circular No. 28-91 requiring that a party "must certify under oath . . . [that]
(a) he has not (t)heretofore commenced any other action or proceeding involving the same
issues in the Supreme Court, the Court of Appeals, or any other tribunal or agency; (b) to the
best of his knowledge, no such action or proceeding is pending" in said courts or agencies. A
violation of the said circular entails sanctions that include the summary dismissal of the multiple
petitions or complaints. To be sure, petitioners have included a VERIFICATION/CERTIFICATION
in their Petition stating "for the record(,) the pendency of Civil Case No. 92-1606 before the
Regional Trial Court of Makati, Branch 134, involving a derivative suit filed by stockholders of
petitioner Bank against the conservator and other defendants but which is the subject of a
pending Motion to Dismiss Without Prejudice.9
Private respondent Ejercito vigorously argues that in spite of this verification, petitioners are
guilty of actual forum shopping because the instant petition pending before this Court involves
"identical parties or interests represented, rights asserted and reliefs sought (as that) currently
pending before the Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the
issues in the two cases are so interwined that a judgement or resolution in either case will
constitute res judicata in the other." 10
On the other hand, petitioners explain 11 that there is no forum-shopping because:
1) In the earlier or "First Case" from which this proceeding arose, the Bank was impleaded
as a defendant, whereas in the "Second Case" (assuming the Bank is the real party in interest in
a derivative suit), it was plaintiff;
2) "The derivative suit is not properly a suit for and in behalf of the corporation under the
circumstances";
3) Although the CERTIFICATION/VERIFICATION (supra) signed by the Bank president and
attached to the Petition identifies the action as a "derivative suit," it "does not mean that it is
one" and "(t)hat is a legal question for the courts to decide";
4) Petitioners did not hide the Second Case at they mentioned it in the said
VERIFICATION/CERTIFICATION.
We rule for private respondent.
To begin with, forum-shopping originated as a concept in private international law.12 , where
non-resident litigants are given the option to choose the forum or place wherein to bring their
suit for various reasons or excuses, including to secure procedural advantages, to annoy and
harass the defendant, to avoid overcrowded dockets, or to select a more friendly venue. To
combat these less than honorable excuses, the principle of forum non conveniens was
developed whereby a court, in conflicts of law cases, may refuse impositions on its jurisdiction
where it is not the most "convenient" or available forum and the parties are not precluded from
seeking remedies elsewhere.
In this light, Black's Law Dictionary 13 says that forum shopping "occurs when a party attempts
to have his action tried in a particular court or jurisdiction where he feels he will receive the
most favorable judgment or verdict." Hence, according to Words and Phrases14 , "a litigant is
open to the charge of "forum shopping" whenever he chooses a forum with slight connection
to factual circumstances surrounding his suit, and litigants should be encouraged to attempt to
settle their differences without imposing undue expenses and vexatious situations on the
courts".
In the Philippines, forum shopping has acquired a connotation encompassing not only a choice
of venues, as it was originally understood in conflicts of laws, but also to a choice of remedies.
As to the first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence
personal actions "where the defendant or any of the defendants resides or may be found, or
where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4, Sec, 2
[b]). As to remedies, aggrieved parties, for example, are given a choice of pursuing civil liabilities
independently of the criminal, arising from the same set of facts. A passenger of a public utility
vehicle involved in a vehicular accident may sue on culpa contractual, culpa aquiliana or culpa
criminal each remedy being available independently of the others although he cannot
recover more than once.
In either of these situations (choice of venue or choice of remedy), the litigant actually shops for
a forum of his action, This was the original concept of the term forum shopping.
Eventually, however, instead of actually making a choice of the forum of their actions, litigants,
through the encouragement of their lawyers, file their actions in all available courts, or invoke
all relevant remedies simultaneously. This practice had not only resulted to (sic) conflicting
adjudications among different courts and consequent confusion enimical (sic) to an orderly
256
administration of justice. It had created extreme inconvenience to some of the parties to the
action.
Thus, "forum shopping" had acquired a different concept which is unethical professional legal
practice. And this necessitated or had given rise to the formulation of rules and canons
discouraging or altogether prohibiting the practice. 15
What therefore originally started both in conflicts of laws and in our domestic law as a legitimate
device for solving problems has been abused and mis-used to assure scheming litigants of
dubious reliefs.
To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already
mentioned, promulgated Circular 28-91. And even before that, the Court had prescribed it in
the Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several
cases 16 the inveterate use of this insidious malpractice. Forum shopping as "the filing of
repetitious suits in different courts" has been condemned by Justice Andres R. Narvasa (now
Chief Justice) in Minister of Natural Resources, et al., vs. Heirs of Orval Hughes, et al., "as a
reprehensible manipulation of court processes and proceedings . . ." 17 when does forum
shopping take place?
There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party seeks
a favorable opinion (other than by appeal or certiorari) in another. The principle applies not only
with respect to suits filed in the courts but also in connection with litigations commenced in the
courts while an administrative proceeding is pending, as in this case, in order to defeat
administrative processes and in anticipation of an unfavorable administrative ruling and a
favorable court ruling. This is specially so, as in this case, where the court in which the second
suit was brought, has no jurisdiction.18
The test for determining whether a party violated the rule against forum shopping has been laid
dawn in the 1986 case of Buan vs. Lopez 19 , also by Chief Justice Narvasa, and that is, forum
shopping exists where the elements of litis pendentia are present or where a final judgment in
one case will amount to res judicata in the other, as follows:
There thus exists between the action before this Court and RTC Case No. 86-36563 identity of
parties, or at least such parties as represent the same interests in both actions, as well as identity
of rights asserted and relief prayed for, the relief being founded on the same facts, and the
identity on the two preceding particulars is such that any judgment rendered in the other action,
will, regardless of which party is successful, amount to res adjudicata in the action under
consideration: all the requisites, in fine, of auter action pendant.
xxx xxx xxx
As already observed, there is between the action at bar and RTC Case No. 86-36563, an identity
as regards parties, or interests represented, rights asserted and relief sought, as well as basis
thereof, to a degree sufficient to give rise to the ground for dismissal known as auter action
pendant or lis pendens. That same identity puts into operation the sanction of twin dismissals
just mentioned. The application of this sanction will prevent any further delay in the settlement
of the controversy which might ensue from attempts to seek reconsideration of or to appeal
from the Order of the Regional Trial Court in Civil Case No. 86-36563 promulgated on July 15,
1986, which dismissed the petition upon grounds which appear persuasive.
Consequently, where a litigant (or one representing the same interest or person) sues the same
party against whom another action or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is
bar to the others; and, a final judgment in one would constitute res judicata and thus would
cause the dismissal of the rest. In either case, forum shopping could be cited by the other party
as a ground to ask for summary dismissal of the two 20 (or more) complaints or petitions, and
for imposition of the other sanctions, which are direct contempt of court, criminal prosecution,
and disciplinary action against the erring lawyer.
Applying the foregoing principles in the case before us and comparing it with the Second Case,
it is obvious that there exist identity of parties or interests represented, identity of rights or
causes and identity of reliefs sought.
Very simply stated, the original complaint in the court a quo which gave rise to the instant
petition was filed by the buyer (herein private respondent and his predecessors-in-interest)
against the seller (herein petitioners) to enforce the alleged perfected sale of real estate. On the
other hand, the complaint 21 in the Second Case seeks to declare such purported sale involving
the same real property "as unenforceable as against the Bank", which is the petitioner herein.
In other words, in the Second Case, the majority stockholders, in representation of the Bank,
are seeking to accomplish what the Bank itself failed to do in the original case in the trial court.
In brief, the objective or the relief being sought, though worded differently, is the same, namely,
to enable the petitioner Bank to escape from the obligation to sell the property to respondent.
In Danville Maritime, Inc. vs. Commission on Audit. 22 , this Court ruled that the filing by a party
of two apparently different actions, but with the same objective, constituted forum shopping:
In the attempt to make the two actions appear to be different, petitioner impleaded different
respondents therein PNOC in the case before the lower court and the COA in the case before
this Court and sought what seems to be different reliefs. Petitioner asks this Court to set aside
the questioned letter-directive of the COA dated October 10, 1988 and to direct said body to
257
approve the Memorandum of Agreement entered into by and between the PNOC and
petitioner, while in the complaint before the lower court petitioner seeks to enjoin the PNOC
from conducting a rebidding and from selling to other parties the vessel "T/T Andres Bonifacio",
and for an extension of time for it to comply with the paragraph 1 of the memorandum of
agreement and damages. One can see that although the relief prayed for in the two (2) actions
are ostensibly different, the ultimate objective in both actions is the same, that is, approval of
the sale of vessel in favor of petitioner and to overturn the letter-directive of the COA of October
10, 1988 disapproving the sale. (emphasis supplied).
In an earlier case 23 but with the same logic and vigor, we held:
In other words, the filing by the petitioners of the instant special civil action for certiorari and
prohibition in this Court despite the pendency of their action in the Makati Regional Trial Court,
is a species of forum-shopping. Both actions unquestionably involve the same transactions, the
same essential facts and circumstances. The petitioners' claim of absence of identity simply
because the PCGG had not been impleaded in the RTC suit, and the suit did not involve certain
acts which transpired after its commencement, is specious. In the RTC action, as in the action
before this Court, the validity of the contract to purchase and sell of September 1, 1986, i.e.,
whether or not it had been efficaciously rescinded, and the propriety of implementing the same
(by paying the pledgee banks the amount of their loans, obtaining the release of the pledged
shares, etc.) were the basic issues. So, too, the relief was the same: the prevention of such
implementation and/or the restoration of the status quo ante. When the acts sought to be
restrained took place anyway despite the issuance by the Trial Court of a temporary restraining
order, the RTC suit did not become functus oficio. It remained an effective vehicle for obtention
of relief; and petitioners' remedy in the premises was plain and patent: the filing of an amended
and supplemental pleading in the RTC suit, so as to include the PCGG as defendant and seek
nullification of the acts sought to be enjoined but nonetheless done. The remedy was certainly
not the institution of another action in another forum based on essentially the same facts, The
adoption of this latter recourse renders the petitioners amenable to disciplinary action and both
their actions, in this Court as well as in the Court a quo, dismissible.
In the instant case before us, there is also identity of parties, or at least, of interests represented.
Although the plaintiffs in the Second Case (Henry L. Co. et al.) are not name parties in the First
Case, they represent the same interest and entity, namely, petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct personal interest
in the matter in controversy. They are not principally or even subsidiarily liable; much less are
they direct parties in the assailed contract of sale; and
Secondly, the allegations of the complaint in the Second Case show that the stockholders are
bringing a "derivative suit". In the caption itself, petitioners claim to have brought suit "for and
in behalf of the Producers Bank of the Philippines" 24 . Indeed, this is the very essence of a
derivative suit:
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holdsstock in order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; emphasis
supplied).
In the face of the damaging admissions taken from the complaint in the Second Case,
petitioners, quite strangely, sought to deny that the Second Case was a derivative suit, reasoning
that it was brought, not by the minority shareholders, but by Henry Co et al., who not only own,
hold or control over 80% of the outstanding capital stock, but also constitute the majority in the
Board of Directors of petitioner Bank. That being so, then they really represent the Bank. So,
whether they sued "derivatively" or directly, there is undeniably an identity of interests/entity
represented.
Petitioner also tried to seek refuge in the corporate fiction that the personality Of the Bank is
separate and distinct from its shareholders. But the rulings of this Court are consistent: "When
the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection
of a monopoly or generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals." 25
In addition to the many cases 26 where the corporate fiction has been disregarded, we now add
the instant case, and declare herewith that the corporate veil cannot be used to shield an
otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether
suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed
to trifle with court processes, particularly where, as in this case, the corporation itself has not
been remiss in vigorously prosecuting or defending corporate causes and in using and applying
remedies available to it. To rule otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum shopping.
Finally, petitioner Bank argued that there cannot be any forum shopping, even assuming
arguendo that there is identity of parties, causes of action and reliefs sought, "because it (the
Bank) was the defendant in the (first) case while it was the plaintiff in the other (Second
258
Case)",citing as authority Victronics Computers, Inc., vs. Regional Trial Court, Branch 63, Makati,
etc. et al., 27 where Court held:
The rule has not been extended to a defendant who, for reasons known only to him, commences
a new action against the plaintiff instead of filing a responsive pleading in the other case
setting forth therein, as causes of action, specific denials, special and affirmative defenses or
even counterclaims, Thus, Velhagen's and King's motion to dismiss Civil Case No. 91-2069 by no
means negates the charge of forum-shopping as such did not exist in the first place. (emphasis
supplied)
Petitioner pointed out that since it was merely the defendant in the original case, it could not
have chosen the forum in said case.
Respondent, on the other hand, replied that there is a difference in factual setting between
Victronics and the present suit. In the former, as underscored in the above-quoted Court ruling,
the defendants did not file any responsive pleading in the first case. In other words, they did not
make any denial or raise any defense or counter-claim therein In the case before us however,
petitioners filed a responsive pleading to the complaint as a result of which, the issues were
joined.
Indeed, by praying for affirmative reliefs and interposing counterclaims in their responsive
pleadings, the petitioners became plaintiffs themselves in the original case, giving unto
themselves the very remedies they repeated in the Second Case.
Ultimately, what is truly important to consider in determining whether forum-shopping exists
or not is the vexation caused the courts and parties-litigant by a party who asks different courts
and/or administrative agencies to rule on the same or related causes and/or to grant the same
or substantially the same reliefs, in the process creating the possibility of conflicting decisions
being rendered by the different fora upon the same issue. In this case, this is exactly the
problem: a decision recognizing the perfection and directing the enforcement of the contract of
sale will directly conflict with a possible decision in the Second Case barring the parties front
enforcing or implementing the said sale. Indeed, a final decision in one would constitute res
judicata in the other 28 .
The foregoing conclusion finding the existence of forum-shopping notwithstanding, the only
sanction possible now is the dismissal of both cases with prejudice, as the other sanctions cannot
be imposed because petitioners' present counsel entered their appearance only during the
proceedings in this Court, and the Petition's VERIFICATION/CERTIFICATION contained sufficient
allegations as to the pendency of the Second Case to show good faith in observing Circular 28-
91. The Lawyers who filed the Second Case are not before us; thus the rudiments of due process
prevent us from motu propio imposing disciplinary measures against them in this Decision.
However, petitioners themselves (and particularly Henry Co, et al.) as litigants are admonished
to strictly follow the rules against forum-shopping and not to trifle with court proceedings and
processes They are warned that a repetition of the same will be dealt with more severely.
Having said that, let it be emphasized that this petition should be dismissed not merely because
of forum-shopping but also because of the substantive issues raised, as will be discussed shortly.
The Second Issue: Was The Contract Perfected?
The respondent Court correctly treated the question of whether or not there was, on the basis
of the facts established, a perfected contract of sale as the ultimate issue. Holding that a valid
contract has been established, respondent Court stated:
There is no dispute that the object of the transaction is that property owned by the defendant
bank as acquired assets consisting of six (6) parcels of land specifically identified under Transfer
Certificates of Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the bank intended
to sell the property. As testified to by the Bank's Deputy Conservator, Jose Entereso, the bank
was looking for buyers of the property. It is definite that the plaintiffs wanted to purchase the
property and it was precisely for this purpose that they met with defendant Rivera, Manager of
the Property Management Department of the defendant bank, in early August 1987. The
procedure in the sale of acquired assets as well as the nature and scope of the authority of
Rivera on the matter is clearly delineated in the testimony of Rivera himself, which testimony
was relied upon by both the bank and by Rivera in their appeal briefs. Thus (TSN of July 30, 1990.
pp. 19-20):
A: The procedure runs this way: Acquired assets was turned over to me and then I
published it in the form of an inter-office memorandum distributed to all branches that these
are acquired assets for sale. I was instructed to advertise acquired assets for sale so on that
basis, I have to entertain offer; to accept offer, formal offer and upon having been offered, I
present it to the Committee. I provide the Committee with necessary information about the
property such as original loan of the borrower, bid price during the foreclosure, total claim of
the bank, the appraised value at the time the property is being offered for sale and then the
information which are relative to the evaluation of the bank to buy which the Committee
considers and it is the Committee that evaluate as against the exposure of the bank and it is also
the Committee that submit to the Conservator for final approval and once approved, we have
to execute the deed of sale and it is the Conservator that sign the deed of sale, sir.
The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying the
property, dealt with and talked to the right person. Necessarily, the agenda was the price of the
259
property, and plaintiffs were dealing with the bank official authorized to entertain offers, to
accept offers and to present the offer to the Committee before which the said official is
authorized to discuss information relative to price determination. Necessarily, too, it being
inherent in his authority, Rivera is the officer from whom official information regarding the price,
as determined by the Committee and approved by the Conservator, can be had. And Rivera
confirmed his authority when he talked with the plaintiff in August 1987. The testimony of
plaintiff Demetria is clear on this point (TSN of May 31,1990, pp. 27-28):
Q: When you went to the Producers Bank and talked with Mr. Mercurio Rivera, did you ask
him point-blank his authority to sell any property?
A: No, sir. Not point blank although it came from him, (W)hen I asked him how long it
would take because he was saying that the matter of pricing will be passed upon by the
committee. And when I asked him how long it will take for the committee to decide and he said
the committee meets every week. If I am not mistaken Wednesday and in about two week's (sic)
time, in effect what he was saying he was not the one who was to decide. But he would refer it
to the committee and he would relay the decision of the committee to me.
Q Please answer the question.
A He did not say that he had the authority (.) But he said he would refer the matter to the
committee and he would relay the decision to me and he did just like that.
"Parenthetically, the Committee referred to was the Past Due Committee of which Luis Co was
the Head, with Jose Entereso as one of the members.
What transpired after the meeting of early August 1987 are consistent with the authority and
the duties of Rivera and the bank's internal procedure in the matter of the sale of bank's assets.
As advised by Rivera, the plaintiffs made a formal offer by a letter dated August 20, 1987 stating
that they would buy at the price of P3.5 Million in cash. The letter was for the attention of
Mercurio Rivera who was tasked to convey and accept such offers. Considering an aspect of the
official duty of Rivera as some sort of intermediary between the plaintiffs-buyers with their
proposed buying price on one hand, and the bank Committee, the Conservator and ultimately
the bank itself with the set price on the other, and considering further the discussion of price at
the meeting of August resulting in a formal offer of P3.5 Million in cash, there can be no other
logical conclusion than that when, on September 1, 1987, Rivera informed plaintiffs by letter
that "the bank's counter-offer is at P5.5 Million for more than 101 hectares on lot basis," such
counter-offer price had been determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs' offer for discussion by the Committee of
such matters as original loan of borrower, bid price during foreclosure, total claim of the bank,
and market value. Tersely put, under the established facts, the price of P5.5 Million was, as
clearly worded in Rivera's letter (Exh. "E"), the official and definitive price at which the bank was
selling the property.
There were averments by defendants below, as well as before this Court, that the P5.5 Million
price was not discussed by the Committee and that price. As correctly characterized by the trial
court, this is not credible. The testimonies of Luis Co and Jose Entereso on this point are at best
equivocal and considering the gratuitous and self-serving character of these declarations, the
bank's submission on this point does not inspire belief. Both Co ad Entereso, as members of the
Past Due Committee of the bank, claim that the offer of the plaintiff was never discussed by the
Committee. In the same vein, both Co and Entereso openly admit that they seldom attend the
meetings of the Committee. It is important to note that negotiations on the price had started in
early August and the plaintiffs had already offered an amount as purchase price, having been
made to understand by Rivera, the official in charge of the negotiation, that the price will be
submitted for approval by the bank and that the bank's decision will be relayed to plaintiffs.
From the facts, the official bank price. At any rate, the bank placed its official, Rivera, in a
position of authority to accept offers to buy and negotiate the sale by having the offer officially
acted upon by the bank. The bank cannot turn around and later say, as it now does, that what
Rivera states as the bank's action on the matter is not in fact so. It is a familiar doctrine, the
doctrine of ostensible authority, that if a corporation knowingly permits one of its officers, or
any other agent, to do acts within the scope of an apparent authority, and thus holds him out
to the public as possessing power to do those acts, the corporation will, as against any one who
has in good faith dealt with the corporation through such agent, he estopped from denying his
authority (Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of Appeals, 94 SCRA 357, 369-
370; Prudential Bank v. Court of Appeals, G.R. No. 103957, June 14, 1993). 29
Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as
follows: "(1) Consent of the contracting parties; (2) Object certain which is the subject matter of
the contract; (3) Cause of the obligation which is established."
There is no dispute on requisite no. 2. The object of the questioned contract consists of the six
(6) parcels of land in Sta. Rosa, Laguna with an aggregate area of about 101 hectares, more or
less, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however,
a dispute on the first and third requisites.
Petitioners allege that "there is no counter-offer made by the Bank, and any supposed counter-
offer which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by
the Bank, there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept." 30
They disputed the factual basis of the respondent Court's findings that there was an offer made
by Janolo for P3.5 million, to which the Bank counter-offered P5.5 million. We have perused the
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evidence but cannot find fault with the said Court's findings of fact. Verily, in a petition under
Rule 45 such as this, errors of fact if there be any - are, as a rule, not reviewable. The mere
fact that respondent Court (and the trial court as well) chose to believe the evidence presented
by respondent more than that presented by petitioners is not by itself a reversible error. In fact,
such findings merit serious consideration by this Court, particularly where, as in this case, said
courts carefully and meticulously discussed their findings. This is basic.
Be that as it may, and in addition to the foregoing disquisitions by the Court of Appeals, let us
review the question of Rivera's authority to act and petitioner's allegations that the P5.5 million
counter-offer was extinguished by the P4.25 million revised offer of Janolo. Here, there are
questions of law which could be drawn from the factual findings of the respondent Court. They
also delve into the contractual elements of consent and cause.
The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of "apparent authority", with special reference to banks, was laid out in Prudential Bank
vs. Court of Appeals31 , where it was held that:
Conformably, we have declared in countless decisions that the principal is liable for obligations
contracted by the agent. The agent's apparent representation yields to the principal's true
representation and the contract is considered as entered into between the principal and the
third person (citing National Food Authority vs. Intermediate Appellate Court, 184 SCRA 166).
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course
of dealings of the officers in their representative capacity but not for acts outside the scape of
their authority (9 C.J.S., p. 417). A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate
in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for
such frauds even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114).
Accordingly, a banking corporation is liable to innocent third persons where the representation
is made in the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and attempting
to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit
(McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR 1021).
Application of these principles is especially necessary because banks have a fiduciary
relationship with the public and their stability depends on the confidence of the people in their
honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the
selection and supervision of its employees, resulting in prejudice to their depositors.
From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent
or implied authority to act for the Bank in the matter of selling its acquired assets. This evidence
includes the following:
(a) The petition itself in par. II-i (p. 3) states that Rivera was "at all times material to this
case, Manager of the Property Management Department of the Bank". By his own admission,
Rivera was already the person in charge of the Bank's acquired assets (TSN, August 6, 1990, pp.
8-9);
(b) As observed by respondent Court, the land was definitely being sold by the Bank. And
during the initial meeting between the buyers and Rivera, the latter suggested that the buyers'
offer should be no less than P3.3 million (TSN, April 26, 1990, pp. 16-17);
(c) Rivera received the buyers' letter dated August 30, 1987 offering P3.5 million (TSN, 30
July 1990, p.11);
(d) Rivera signed the letter dated September 1, 1987 offering to sell the property for P5.5
million (TSN, July 30, p. 11);
(e) Rivera received the letter dated September 17, 1987 containing the buyers' proposal to
buy the property for P4.25 million (TSN, July 30, 1990, p. 12);
(f) Rivera, in a telephone conversation, confirmed that the P5.5 million was the final price
of the Bank (TSN, January 16, 1990, p. 18);
(g) Rivera arranged the meeting between the buyers and Luis Co on September 28, 1994,
during which the Bank's offer of P5.5 million was confirmed by Rivera (TSN, April 26, 1990, pp.
34-35). At said meeting, Co, a major shareholder and officer of the Bank, confirmed Rivera's
statement as to the finality of the Bank's counter-offer of P5.5 million (TSN, January 16, 1990, p.
21; TSN, April 26, 1990, p. 35);
(h) In its newspaper advertisements and announcements, the Bank referred to Rivera as
the officer acting for the Bank in relation to parties interested in buying assets owned/acquired
by the Bank. In fact, Rivera was the officer mentioned in the Bank's advertisements offering for
sale the property in question (cf. Exhs. "S" and "S-1").
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et. al.32 , the Court,
through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by
similar circumstances surrounding his dealings with buyers.
To be sure, petitioners attempted to repudiate Rivera's apparent authority through documents
and testimony which seek to establish Rivera's actual authority. These pieces of evidence,
however, are inherently weak as they consist of Rivera's self-serving testimony and various
inter-office memoranda that purport to show his limited actual authority, of which private
respondent cannot be charged with knowledge. In any event, since the issue is apparent
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authority, the existence of which is borne out by the respondent Court's findings, the evidence
of actual authority is immaterial insofar as the liability of a corporation is concerned 33 .
Petitioners also argued that since Demetria and Janolo were experienced lawyers and their "law
firm" had once acted for the Bank in three criminal cases, they should be charged with actual
knowledge of Rivera's limited authority. But the Court of Appeals in its Decision (p. 12) had
already made a factual finding that the buyers had no notice of Rivera's actual authority prior to
the sale. In fact, the Bank has not shown that they acted as its counsel in respect to any acquired
assets; on the other hand, respondent has proven that Demetria and Janolo merely associated
with a loose aggrupation of lawyers (not a professional partnership), one of whose members
(Atty. Susana Parker) acted in said criminal cases.
Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer in the letter
dated September 17, 1987 extinguished the Bank's offer of P5.5 million 34 .They disputed the
respondent Court's finding that "there was a meeting of minds when on 30 September 1987
Demetria and Janolo through Annex "L" (letter dated September 30, 1987) "accepted" Rivera's
counter offer of P5.5 million under Annex "J" (letter dated September 17, 1987)", citing the late
Justice Paras35 , Art. 1319 of the Civil Code 36 and related Supreme Court rulings starting with
Beaumont vs. Prieto 37 .
However, the above-cited authorities and precedents cannot apply in the instant case because,
as found by the respondent Court which reviewed the testimonies on this point, what was
"accepted" by Janolo in his letter dated September 30, 1987 was the Bank's offer of P5.5 million
as confirmed and reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their
meeting on September 28, 1987. Note that the said letter of September 30, 1987 begins
with"(p)ursuant to our discussion last 28 September 1987 . . .
Petitioners insist that the respondent Court should have believed the testimonies of Rivera and
Co that the September 28, 1987 meeting "was meant to have the offerors improve on their
position of P5.5. million."38 However, both the trial court and the Court of Appeals found
petitioners' testimonial evidence "not credible", and we find no basis for changing this finding
of fact.
Indeed, we see no reason to disturb the lower courts' (both the RTC and the CA) common finding
that private respondents' evidence is more in keeping with truth and logic that during the
meeting on September 28, 1987, Luis Co and Rivera "confirmed that the P5.5 million price has
been passed upon by the Committee and could no longer be lowered (TSN of April 27, 1990, pp.
34-35)"39 . Hence, assuming arguendo that the counter-offer of P4.25 million extinguished the
offer of P5.5 million, Luis Co's reiteration of the said P5.5 million price during the September 28,
1987 meeting revived the said offer. And by virtue of the September 30, 1987 letter accepting
this revived offer, there was a meeting of the minds, as the acceptance in said letter was
absolute and unqualified.
We note that the Bank's repudiation, through Conservator Encarnacion, of Rivera's authority
and action, particularly the latter's counter-offer of P5.5 million, as being "unauthorized and
illegal" came only on May 12, 1988 or more than seven (7) months after Janolo' acceptance.
Such delay, and the absence of any circumstance which might have justifiably prevented the
Bank from acting earlier, clearly characterizes the repudiation as nothing more than a last-
minute attempt on the Bank's part to get out of a binding contractual obligation.
Taken together, the factual findings of the respondent Court point to an implied admission on
the part of the petitioners that the written offer made on September 1, 1987 was carried
through during the meeting of September 28, 1987. This is the conclusion consistent with human
experience, truth and good faith.
It also bears noting that this issue of extinguishment of the Bank's offer of P5.5 million was raised
for the first time on appeal and should thus be disregarded.
This Court in several decisions has repeatedly adhered to the principle that points of law,
theories, issues of fact and arguments not adequately brought to the attention of the trial court
need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised
for the first time on appeal (Santos vs. IAC, No. 74243, November 14, 1986, 145 SCRA 592).40
. . . It is settled jurisprudence that an issue which was neither averred in the complaint nor raised
during the trial in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process (Dihiansan vs. CA, 153 SCRA 713
[1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty & Development Corp. vs. CA, 157
SCRA 425 [1988]; Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029, August 30,
1990).41
Since the issue was not raised in the pleadings as an affirmative defense, private respondent
was not given an opportunity in the trial court to controvert the same through opposing
evidence. Indeed, this is a matter of due process. But we passed upon the issue anyway, if only
to avoid deciding the case on purely procedural grounds, and we repeat that, on the basis of the
evidence already in the record and as appreciated by the lower courts, the inevitable conclusion
is simply that there was a perfected contract of sale.
The Third Issue: Is the Contract Enforceable?
The petition alleged42 :
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Even assuming that Luis Co or Rivera did relay a verbal offer to sell at P5.5 million during the
meeting of 28 September 1987, and it was this verbal offer that Demetria and Janolo accepted
with their letter of 30 September 1987, the contract produced thereby would be unenforceable
by action there being no note, memorandum or writing subscribed by the Bank to evidence
such contract. (Please see article 1403[2], Civil Code.)
Upon the other hand, the respondent Court in its Decision (p, 14) stated:
. . . Of course, the bank's letter of September 1, 1987 on the official price and the plaintiffs'
acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of sale.
They are however clear embodiments of the fact that a contract of sale was perfected between
the parties, such contract being binding in whatever form it may have been entered into (case
citations omitted). Stated simply, the banks' letter of September 1, 1987, taken together with
plaintiffs' letter dated September 30, 1987, constitute in law a sufficient memorandum of a
perfected contract of sale.
The respondent Court could have added that the written communications commenced not only
from September 1, 1987 but from Janolo's August 20, 1987 letter. We agree that, taken
together, these letters constitute sufficient memoranda since they include the names of the
parties, the terms and conditions of the contract, the price and a description of the property as
the object of the contract.
But let it be assumed arguendo that the counter-offer during the meeting on September 28,
1987 did constitute a "new" offer which was accepted by Janolo on September 30, 1987. Still,
the statute of frauds will not apply by reason of the failure of petitioners to object to oral
testimony proving petitioner Bank's counter-offer of P5.5 million. Hence, petitioners by such
utter failure to object are deemed to have waived any defects of the contract under the
statute of frauds, pursuant to Article 1405 of the Civil Code:
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403,
are ratified by the failure to object to the presentation of oral evidence to prove the same, or
by the acceptance of benefits under them.
As private respondent pointed out in his Memorandum, oral testimony on the reaffirmation of
the counter-offer of P5.5 million is a plenty and the silence of petitioners all throughout the
presentation makes the evidence binding on them thus;
A Yes, sir, I think it was September 28, 1987 and I was again present because Atty.
Demetria told me to accompany him we were able to meet Luis Co at the Bank.
xxx xxx xxx
Q Now, what transpired during this meeting with Luis Co of the Producers Bank?
A Atty. Demetria asked Mr. Luis Co whether the price could be reduced, sir.
Q What price?
A The 5.5 million pesos and Mr. Luis Co said that the amount cited by Mr. Mercurio Rivera
is the final price and that is the price they intends (sic) to have, sir.
Q What do you mean?.
A That is the amount they want, sir.
Q What is the reaction of the plaintiff Demetria to Luis Co's statement (sic) that the
defendant Rivera's counter-offer of 5.5 million was the defendant's bank (sic) final offer?
A He said in a day or two, he will make final acceptance, sir.
Q What is the response of Mr. Luis Co?.
A He said he will wait for the position of Atty. Demetria, sir.
[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 18-21.]
Q What transpired during that meeting between you and Mr. Luis Co of the defendant
Bank?
A We went straight to the point because he being a busy person, I told him if the amount
of P5.5 million could still be reduced and he said that was already passed upon by the
committee. What the bank expects which was contrary to what Mr. Rivera stated. And he told
me that is the final offer of the bank P5.5 million and we should indicate our position as soon as
possible.
Q What was your response to the answer of Mr. Luis Co?
A I said that we are going to give him our answer in a few days and he said that was it.
Atty. Fajardo and I and Mr. Mercurio [Rivera] was with us at the time at his office.
Q For the record, your Honor please, will you tell this Court who was with Mr. Co in his
Office in Producers Bank Building during this meeting?
A Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.
Q By Mr. Co you are referring to?
A Mr. Luis Co.
Q After this meeting with Mr. Luis Co, did you and your partner accede on (sic) the counter
offer by the bank?
A Yes, sir, we did.? Two days thereafter we sent our acceptance to the bank which offer
we accepted, the offer of the bank which is P5.5 million.
[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]
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Q According to Atty. Demetrio Demetria, the amount of P5.5 million was reached by the
Committee and it is not within his power to reduce this amount. What can you say to that
statement that the amount of P5.5 million was reached by the Committee?
A It was not discussed by the Committee but it was discussed initially by Luis Co and the
group of Atty. Demetrio Demetria and Atty. Pajardo (sic) in that September 28, 1987 meeting,
sir.
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]
The Fourth Issue: May the Conservator Revoke
the Perfected and Enforceable Contract.
It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank
of the Philippines during the time that the negotiation and perfection of the contract of sale
took place. Petitioners energetically contended that the conservator has the power to revoke or
overrule actions of the management or the board of directors of a bank, under Section 28-A of
Republic Act No. 265 (otherwise known as the Central Bank Act) as follows:
Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a non-bank financial intermediary
performing quasi-banking functions is in a state of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate to protect the interest of depositors and
creditors, the Monetary Board may appoint a conservator to take charge of the assets, liabilities,
and the management of that institution, collect all monies and debts due said institution and
exercise all powers necessary to preserve the assets of the institution, reorganize the
management thereof, and restore its viability. He shall have the power to overrule or revoke the
actions of the previous management and board of directors of the bank or non-bank financial
intermediary performing quasi-banking functions, any provision of law to the contrary
notwithstanding, and such other powers as the Monetary Board shall deem necessary.
In the first place, this issue of the Conservator's alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition as this was not litigated
in the trial court or Court of Appeals. As already stated earlier, issues not raised and/or
ventilated in the trial court, let alone in the Court of Appeals, "cannot be raised for the first time
on appeal as it would be offensive to the basic rules of fair play, justice and due process."43
In the second place, there is absolutely no evidence that the Conservator, at the time the
contract was perfected, actually repudiated or overruled said contract of sale. The Bank's acting
conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria
and Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who
took over from Romey after the sale was perfected on September 30, 1987 (Annex V, petition)
which unilaterally repudiated not the contract but the authority of Rivera to make a
binding offer and which unarguably came months after the perfection of the contract. Said
letter dated May 12, 1988 is reproduced hereunder:
May 12, 1988
Atty. Noe C. Zarate
Zarate Carandang Perlas & Ass.
Suite 323 Rufino Building
Ayala Avenue, Makati, Metro-Manila
Dear Atty. Zarate:
This pertains to your letter dated May 5, 1988 on behalf of Attys. Janolo and Demetria regarding
the six (6) parcels of land located at Sta. Rosa, Laguna.
We deny that Producers Bank has ever made a legal counter-offer to any of your clients nor
perfected a "contract to sell and buy" with any of them for the following reasons.
In the "Inter-Office Memorandum" dated April 25, 1986 addressed to and approved by former
Acting Conservator Mr. Andres I. Rustia, Producers Bank Senior Manager Perfecto M. Pascua
detailed the functions of Property Management Department (PMD) staff and officers (Annex
A.), you will immediately read that Manager Mr. Mercurio Rivera or any of his subordinates has
no authority, power or right to make any alleged counter-offer. In short, your lawyer-clients did
not deal with the authorized officers of the bank.
Moreover, under Sec. 23 and 36 of the Corporation Code of the Philippines (Bates Pambansa
Blg. 68.) and Sec. 28-A of the Central Bank Act (Rep. Act No. 265, as amended), only the Board
of Directors/Conservator may authorize the sale of any property of the corportion/bank..
Our records do not show that Mr. Rivera was authorized by the old board or by any of the bank
conservators (starting January, 1984) to sell the aforesaid property to any of your clients.
Apparently, what took place were just preliminary discussions/consultations between him and
your clients, which everyone knows cannot bind the Bank's Board or Conservator.
We are, therefore, constrained to refuse any tender of payment by your clients, as the same is
patently violative of corporate and banking laws. We believe that this is more than sufficient
legal justification for refusing said alleged tender.
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Rest assured that we have nothing personal against your clients. All our acts are official, legal
and in accordance with law. We also have no personal interest in any of the properties of the
Bank.
Please be advised accordingly.
Very truly yours,
(Sgd.) Leonida T. Encarnacion
LEONIDA T. EDCARNACION
Acting Conservator
In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to
the conservator of a bank, it must be pointed out that such powers must be related to the
"(preservation of) the assets of the bank, (the reorganization of) the management thereof and
(the restoration of) its viability." Such powers, enormous and extensive as they are, cannot
extend to the post-facto repudiation of perfected transactions, otherwise they would infringe
against the non-impairment clause of the Constitution 44 . If the legislature itself cannot revoke
an existing valid contract, how can it delegate such non-existent powers to the conservator
under Section 28-A of said law?
Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that
are, under existing law, deemed to be defective i.e., void, voidable, unenforceable or
rescissible. Hence, the conservator merely takes the place of a bank's board of directors. What
the said board cannot do such as repudiating a contract validly entered into under the
doctrine of implied authority the conservator cannot do either. Ineluctably, his power is not
unilateral and he cannot simply repudiate valid obligations of the Bank. His authority would be
only to bring court actions to assail such contracts as he has already done so in the instant
case. A contrary understanding of the law would simply not be permitted by the Constitution.
Neither by common sense. To rule otherwise would be to enable a failing bank to become
solvent, at the expense of third parties, by simply getting the conservator to unilaterally revoke
all previous dealings which had one way or another or come to be considered unfavorable to
the Bank, yielding nothing to perfected contractual rights nor vested interests of the third
parties who had dealt with the Bank.
The Fifth Issue: Were There Reversible Errors of Facts?
Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of
fact by the Court of Appeals are not reviewable by the Supreme Court. In Andres vs.
Manufacturers Hanover & Trust Corporation, 45 , we held:
. . . The rule regarding questions of fact being raised with this Court in a petition for certiorari
under Rule 45 of the Revised Rules of Court has been stated in Remalante vs. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus:
The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari
under Rule 45 of the Revised Rules of Court. "The jurisdiction of the Supreme Court in cases
brought to it from the Court of Appeals is limited to reviewing and revising the errors of law
imputed to it, its findings of the fact being conclusive " [Chan vs. Court of Appeals, G.R. No. L-
27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions]. This Court has
emphatically declared that "it is not the function of the Supreme Court to analyze or weigh such
evidence all over again, its jurisdiction being limited to reviewing errors of law that might have
been committed by the lower court" (Tiongco v. De la Merced, G. R. No. L-24426, July 25, 1974,
58 SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121 SCRA 865;
Baniqued vs. Court of Appeals, G. R. No. L-47531, February 20, 1984, 127 SCRA 596). "Barring,
therefore, a showing that the findings complained of are totally devoid of support in the record,
or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings
must stand, for this Court is not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties" [Santa Ana, Jr. vs. Hernandez, G. R. No. L-
16394, December 17, 1966, 18 SCRA 973] [at pp. 144-145.]
Likewise, in Bernardo vs. Court of Appeals 46 , we held:
The resolution of this petition invites us to closely scrutinize the facts of the case, relating to the
sufficiency of evidence and the credibility of witnesses presented. This Court so held that it is
not the function of the Supreme Court to analyze or weigh such evidence all over again. The
Supreme Court's jurisdiction is limited to reviewing errors of law that may have been committed
by the lower court. The Supreme Court is not a trier of facts. . . .
As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and
Development Corp. 47 :
The Court has consistently held that the factual findings of the trial court, as well as the Court
of Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the
inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised on a misapprehension of
facts; when the findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee. After a careful study of the case at bench, we find
265
none of the above grounds present to justify the re-evaluation of the findings of fact made by
the courts below.
In the same vein, the ruling of this Court in the recent case of South Sea Surety and Insurance
Company Inc. vs. Hon. Court of Appeals, et al. 48 is equally applicable to the present case:
We see no valid reason to discard the factual conclusions of the appellate court, . . . (I)t is not
the function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both the
trial court and the appellate court on the matter coincide. (emphasis supplied)
Petitioners, however, assailed the respondent Court's Decision as "fraught with findings and
conclusions which were not only contrary to the evidence on record but have no bases at all,"
specifically the findings that (1) the "Bank's counter-offer price of P5.5 million had been
determined by the past due committee and approved by conservator Romey, after Rivera
presented the same for discussion" and (2) "the meeting with Co was not to scale down the
price and start negotiations anew, but a meeting on the already determined price of P5.5
million" Hence, citing Philippine National Bank vs. Court of Appeals 49 , petitioners are asking us
to review and reverse such factual findings.
The first point was clearly passed upon by the Court of Appeals 50 , thus:
There can be no other logical conclusion than that when, on September 1, 1987, Rivera informed
plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for more than 101 hectares
on lot basis, "such counter-offer price had been determined by the Past Due Committee and
approved by the Conservator after Rivera had duly presented plaintiffs' offer for discussion by
the Committee . . . Tersely put, under the established fact, the price of P5.5 Million was, as
clearly worded in Rivera's letter (Exh. "E"), the official and definitive price at which the bank was
selling the property. (p. 11, CA Decision)
xxx xxx xxx
. . . The argument deserves scant consideration. As pointed out by plaintiff, during the meeting
of September 28, 1987 between the plaintiffs, Rivera and Luis Co, the senior vice-president of
the bank, where the topic was the possible lowering of the price, the bank official refused it and
confirmed that the P5.5 Million price had been passed upon by the Committee and could no
longer be lowered (TSN of April 27, 1990, pp. 34-35) (p. 15, CA Decision).
The respondent Court did not believe the evidence of the petitioners on this point,
characterizing it as "not credible" and "at best equivocal and considering the gratuitous and self-
serving character of these declarations, the bank's submissions on this point do not inspire
belief."
To become credible and unequivocal, petitioners should have presented then Conservator
Rodolfo Romey to testify on their behalf, as he would have been in the best position to establish
their thesis. Under the rules on evidence 51 , such suppression gives rise to the presumption
that his testimony would have been adverse, if produced.
The second point was squarely raised in the Court of Appeals, but petitioners' evidence was
deemed insufficient by both the trial court and the respondent Court, and instead, it was
respondent's submissions that were believed and became bases of the conclusions arrived at.
In fine, it is quite evident that the legal conclusions arrived at from the findings of fact by the
lower courts are valid and correct. But the petitioners are now asking this Court to disturb these
findings to fit the conclusion they are espousing, This we cannot do.
To be sure, there are settled exceptions where the Supreme Court may disregard findings of fact
by the Court of Appeals 52 . We have studied both the records and the CA Decision and we find
no such exceptions in this case. On the contrary, the findings of the said Court are supported by
a preponderance of competent and credible evidence. The inferences and conclusions are
seasonably based on evidence duly identified in the Decision. Indeed, the appellate court
patiently traversed and dissected the issues presented before it, lending credibility and
dependability to its findings. The best that can be said in favor of petitioners on this point is that
the factual findings of respondent Court did not correspond to petitioners' claims, but were
closer to the evidence as presented in the trial court by private respondent. But this alone is no
reason to reverse or ignore such factual findings, particularly where, as in this case, the trial
court and the appellate court were in common agreement thereon. Indeed, conclusions of fact
of a trial judge as affirmed by the Court of Appeals are conclusive upon this Court, absent
any serious abuse or evident lack of basis or capriciousness of any kind, because the trial court
is in a better position to observe the demeanor of the witnesses and their courtroom manner
as well as to examine the real evidence presented.
Epilogue.
In summary, there are two procedural issues involved forum-shopping and the raising of issues
for the first time on appeal [viz., the extinguishment of the Bank's offer of P5.5 million and the
conservator's powers to repudiate contracts entered into by the Bank's officers] which per se
could justify the dismissal of the present case. We did not limit ourselves thereto, but delved as
well into the substantive issues the perfection of the contract of sale and its enforceability,
which required the determination of questions of fact. While the Supreme Court is not a trier of
266
facts and as a rule we are not required to look into the factual bases of respondent Court's
decisions and resolutions, we did so just the same, if only to find out whether there is reason to
disturb any of its factual findings, for we are only too aware of the depth, magnitude and vigor
by which the parties through their respective eloquent counsel, argued their positions before
this Court.
We are not unmindful of the tenacious plea that the petitioner Bank is operating abnormally
under a government-appointed conservator and "there is need to rehabilitate the Bank in order
to get it back on its feet . . . as many people depend on (it) for investments, deposits and well as
employment. As of June 1987, the Bank's overdraft with the Central Bank had already reached
P1.023 billion . . . and there were (other) offers to buy the subject properties for a substantial
amount of money." 53
While we do not deny our sympathy for this distressed bank, at the same time, the Court cannot
emotionally close its eyes to overriding considerations of substantive and procedural law, like
respect for perfected contracts, non-impairment of obligations and sanctions against forum-
shopping, which must be upheld under the rule of law and blind justice.
This Court cannot just gloss over private respondent's submission that, while the subject
properties may currently command a much higher price, it is equally true that at the time of the
transaction in 1987, the price agreed upon of P5.5 million was reasonable, considering that the
Bank acquired these properties at a foreclosure sale for no more than P3.5 million 54 . That the
Bank procrastinated and refused to honor its commitment to sell cannot now be used by it to
promote its own advantage, to enable it to escape its binding obligation and to reap the benefits
of the increase in land values. To rule in favor of the Bank simply because the property in
question has algebraically accelerated in price during the long period of litigation is to reward
lawlessness and delays in the fulfillment of binding contracts. Certainly, the Court cannot stamp
its imprimatur on such outrageous proposition.
WHEREFORE, finding no reversible error in the questioned Decision and Resolution, the Court
hereby DENIES the petition. The assailed Decision is AFFIRMED. Moreover, petitioner Bank is
REPRIMANDED for engaging in forum-shopping and WARNED that a repetition of the same or
similar acts will be dealt with more severely. Costs against petitioners.
SO ORDERED.
G.R. No. 76118 March 30, 1993
THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners,
vs.
COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.
BELLOSILLO, J.:
May a Monetary Board resolution placing a private bank under receivership be annulled on the
ground of lack of prior notice and hearing?
This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867
entitled "The Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon. Jose C. de Guzman
and Triumph Savings Bank," promulgated 26 September 1986, which affirmed the twin orders
of the Regional Trial Court of Quezon City issued 11 November 19851 denying herein petitioners'
motion to dismiss Civil Case No. Q-45139, and directing petitioner Ramon V. Tiaoqui to restore
the private management of Triumph Savings Bank (TSB) to its elected board of directors and
officers, subject to Central Bank comptrollership.2
The antecedent facts: Based on examination reports submitted by the Supervision and
Examination Sector (SES), Department II, of the Central Bank (CB) "that the financial condition
of TSB is one of insolvency and its continuance in business would involve probable loss to its
depositors and creditors,"3 the Monetary Board (MB) issued on 31 May 1985 Resolution No.
596 ordering the closure of TSB, forbidding it from doing business in the Philippines, placing it
under receivership, and appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3
June 1985.4
On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed
as Civil Case No. Q-45139, against Central Bank and Ramon V. Tiaoqui to annul MB Resolution
No. 596, with prayer for injunction, challenging in the process the constitutionality of Sec. 29 of
R.A. 269, otherwise known as "The Central Bank Act," as amended, insofar as it authorizes the
Central Bank to take over a banking institution even if it is not charged with violation of any law
or regulation, much less found guilty thereof.5
On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB
Resolution No. 596 "until further orders", thus prompting them to move for the quashal of the
restraining order (TRO) on the ground that it did not comply with said Sec. 29, i.e., that TSB failed
to show convincing proof of arbitrariness and bad faith on the part of petitioners;' and, that TSB
failed to post the requisite bond in favor of Central Bank.
267
On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the
relief sought and denied the application of TSB for injunction. Thereafter, Triumph Savings Bank
filed with Us a petition for certiorari under Rule 65 of the Rules of Court6 dated 25 July 1985
seeking to enjoin the continued implementation of the questioned MB resolution.
Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the
complaint before the RTC for failure to state a cause of action, i.e., it did not allege ultimate facts
showing that the action was plainly arbitrary and made in bad faith, which are the only grounds
for the annulment of Monetary Board resolutions placing a bank under conservatorship, and
that TSB was without legal capacity to sue except through its receiver.7
On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui
to restore TSB to its private management. On 11 November 1985, the RTC in separate orders
denied petitioners' motion to dismiss and ordered receiver Tiaoqui to restore the management
of TSB to its elected board of directors and officers, subject to CB comptrollership.
Since the orders of the trial court rendered moot the petition for certiorari then pending before
this Court, Central Bank and Tiaoqui moved on 2 December 1985 for the dismissal of G.R. No.
71465 which We granted on 18 December 1985.8
Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of
Appeals on a petition for certiorari and prohibition under Rule 65.9 On 26 September 1986, the
appellate court, upheld the orders of the trial court thus
Petitioners' motion to dismiss was premised on two grounds, namely, that the complaint failed
to state a cause of action and that the Triumph Savings Bank was without capacity to sue except
through its appointed receiver.
Concerning the first ground, petitioners themselves admit that the Monetary Board resolution
placing the Triumph Savings Bank under the receivership of the officials of the Central Bank was
done without prior hearing, that is, without first hearing the side of the bank. They further admit
that said resolution can be the subject of judicial review and may be set aside should it be found
that the same was issued with arbitrariness and in bad faith.
The charge of lack of due process in the complaint may be taken as constitutive of allegations of
arbitrariness and bad faith. This is not of course to be taken as meaning that there must be
previous hearing before the Monetary Board may exercise its powers under Section 29 of its
Charter. Rather, judicial review of such action not being foreclosed, it would be best should
private respondent be given the chance to show and prove arbitrariness and bad faith in the
issuance of the questioned resolution, especially so in the light of the statement of private
respondent that neither the bank itself nor its officials were even informed of any charge of
violating banking laws.
In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view such argument
as being specious, for if we get the drift of petitioners' argument, they mean to convey the
impression that only the CB appointed receiver himself may question the CB resolution
appointing him as such. This may be asking for the impossible, for it cannot be expected that
the master, the CB, will allow the receiver it has appointed to question that very appointment.
Should the argument of petitioners be given circulation, then judicial review of actions of the CB
would be effectively checked and foreclosed to the very bank officials who may feel, as in the
case at bar, that the CB action ousting them from the bank deserves to be set aside.
xxx xxx xxx
On the questioned restoration order, this Court must say that it finds nothing whimsical,
despotic, capricious, or arbitrary in its issuance, said action only being in line and congruent to
the action of the Supreme Court in the Banco Filipino Case (G.R. No. 70054) where management
of the bank was restored to its duly elected directors and officers, but subject to the Central
Bank comptrollership.10
On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this
petition under Rule 45 of the Rules of Court praying that the decision of the Court of Appeals in
CA-G.R. SP No. 07867 be set aside, and that the civil case pending before the RTC of Quezon
City, Civil Case No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred
(1) in affirming that an insolvent bank that had been summarily closed by the Monetary
Board should be restored to its private management supposedly because such summary closure
was "arbitrary and in bad faith" and a denial of "due process";
(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a
complaint to annul a Monetary Board receivership resolution under Sec. 29 of R.A. 265 "may be
taken as . . allegations of arbitrariness and bad faith"; and
(3) in holding that the owners and former officers of an insolvent bank may still act or sue
in the name and corporate capacity of such bank, even after it had been ordered closed and
placed under receivership.11
The respondents, on the other hand, allege inter alia that in the Banco Filipino case,12 We held
that CB violated the rule on administrative due process laid down in Ang Tibay vs. CIR (69 Phil.
268
635) and Eastern Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice
and hearing be afforded to all parties in administrative proceedings. Since MB Resolution No.
596 was adopted without TSB being previously notified and heard, according to respondents,
the same is void for want of due process; consequently, the bank's management should be
restored to its board of directors and officers.13
Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in
cases involving bank closures should not be required since in all probability a hearing would not
only cause unnecessary delay but also provide bank "insiders" and stockholders the opportunity
to further dissipate the bank's resources, create liabilities for the bank up to the insured amount
of P40,000.00, and even destroy evidence of fraud or irregularity in the bank's operations to the
prejudice of its depositors and creditors. 14 Petitioners further argue that the legislative intent
of Sec. 29 is to repose in the Monetary Board exclusive power to determine the existence of
statutory grounds for the closure and liquidation of banks, having the required expertise and
specialized competence to do so.
The first issue raised before Us is whether absence of prior notice and hearing may be
considered acts of arbitrariness and bad faith sufficient to annul a Monetary Board resolution
enjoining a bank from doing business and placing it under receivership. Otherwise stated, is
absence of prior notice and hearing constitutive of acts of arbitrariness and bad faith?
Under Sec. 29 of R.A. 265,15 the Central Bank, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition of any bank, and finding
such condition to be one of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, forbid the bank or non-bank financial institution to
do business in the Philippines; and shall designate an official of the CB or other competent
person as receiver to immediately take charge of its assets and liabilities. The fourth
paragraph,16 which was then in effect at the time the action was commenced, allows the filing
of a case to set aside the actions of the Monetary Board which are tainted with arbitrariness and
bad faith.
Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and
hearing before a bank may be directed to stop operations and placed under receivership. When
par. 4 (now par. 5, as amended by E.O. 289) provides for the filing of a case within ten (10) days
after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed
actions should precede the filing of the case. Plainly, the legislature could not have intended to
authorize "no prior notice and hearing" in the closure of the bank and at the same time allow a
suit to annul it on the basis of absence thereof.
In the early case of Rural Bank of Lucena, Inc. v. Arca [1965],17 We held that a previous hearing
is nowhere required in Sec. 29 nor does the constitutional requirement of due process demand
that the correctness of the Monetary Board's resolution to stop operation and proceed to
liquidation be first adjudged before making the resolution effective. It is enough that a
subsequent judicial review be provided.
Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a previous
hearing before the Monetary Board can implement its resolution closing a bank, since its action
is subject to judicial scrutiny as provided by law.
It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial
institution placed under receivership of the opportunity to be heard and present evidence on
arbitrariness and bad faith because within ten (10) days from the date the receiver takes charge
of the assets of the bank, resort to judicial review may be had by filing an appropriate pleading
with the court. Respondent TSB did in fact avail of this remedy by filing a complaint with the RTC
of Quezon City on the 8th day following the takeover by the receiver of the bank's assets on 3
June 1985.
This "close now and hear later" scheme is grounded on practical and legal considerations to
prevent unwarranted dissipation of the bank's assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders and the general public.
In Rural Bank of Buhi, Inc. v. Court of Appeals,19 We stated that
. . . due process does not necessarily require a prior hearing; a hearing or an opportunity to be
heard may be subsequent to the closure. One can just imagine the dire consequences of a prior
hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the process,
fortunes may be wiped out and disillusionment will run the gamut of the entire banking
community.
We stressed in Central Bank of the Philippines v. Court of Appeals20 that
. . . the banking business is properly subject to reasonable regulation under the police power of
the state because of its nature and relation to the fiscal affairs of the people and the revenues
of the state (9 CJS 32). Banks are affected with public interest because they receive funds from
the general public in the form of deposits. Due to the nature of their transactions and functions,
a fiduciary relationship is created between the banking institutions and their depositors.
Therefore, banks are under the obligation to treat with meticulous care and utmost fidelity the
accounts of those who have reposed their trust and confidence in them (Simex International
[Manila], Inc., v. Court of Appeals, 183 SCRA 360 [1990]).
269

It is then the Government's responsibility to see to it that the financial interests of those who
deal with the banks and banking institutions, as depositors or otherwise, are protected. In this
country, that task is delegated to the Central Bank which, pursuant to its Charter (R.A. 265, as
amended), is authorized to administer the monetary, banking and credit system of the
Philippines. Under both the 1973 and 1987 Constitutions, the Central Bank is tasked with
providing policy direction in the areas of money, banking and credit; corollarily, it shall have
supervision over the operations of banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art.
XII, 1987 Constitution). Under its charter, the CB is further authorized to take the necessary steps
against any banking institution if its continued operation would cause prejudice to its depositors,
creditors and the general public as well. This power has been expressly recognized by this Court.
In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Banks (189 SCRA 14
[1990], this Court held that:
. . . [u]nless adequate and determined efforts are taken by the government against distressed
and mismanaged banks, public faith in the banking system is certain to deteriorate to the
prejudice of the national economy itself, not to mention the losses suffered by the bank
depositors, creditors, and stockholders, who all deserve the protection of the government. The
government cannot simply cross its arms while the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of the Central Bank in such an event to step in
and salvage the remaining resources of the bank so that they may not continue to be dissipated
or plundered by those entrusted with their management.
Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a
situation where the procedural rights invoked by private respondent would take precedence
over the substantive interests of depositors, creditors and stockholders over the assets of the
bank.
Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run
and drain its assets in days or even hours leading to insolvency even if the bank be actually
solvent. The procedure prescribed in Sec. 29 is truly designed to protect the interest of all
concerned, i.e., the depositors, creditors and stockholders, the bank itself, and the general
public, and the summary closure pales in comparison to the protection afforded public interest.
At any rate, the bank is given full opportunity to prove arbitrariness and bad faith in placing the
bank under receivership, in which event, the resolution may be properly nullified and the
receivership lifted as the trial court may determine.
The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual
circumstances therein which are not attendant in the present case. We ruled in Banco Filipino
that the closure of the bank was arbitrary and attendant with grave abuse of discretion, not
because of the absence of prior notice and hearing, but that the Monetary Board had no
sufficient basis to arrive at a sound conclusion of insolvency to justify the closure. In other words,
the arbitrariness, bad faith and abuse of discretion were determined only after the bank was
placed under conservatorship and evidence thereon was received by the trial court. As this Court
found in that case, the Valenzuela, Aurellano and Tiaoqui Reports contained unfounded
assumptions and deductions which did not reflect the true financial condition of the bank. For
instance, the subtraction of an uncertain amount as valuation reserve from the assets of the
bank would merely result in its net worth or the unimpaired capital and surplus; it did not reflect
the total financial condition of Banco Filipino.
Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its
total liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to
liquidate the bank; perhaps it could have merely ordered its reorganization or rehabilitation, if
need be. Clearly, there was in that case a manifest arbitrariness, abuse of discretion and bad
faith in the closure of Banco Filipino by the Monetary Board. But, this is not the case before Us.
For here, what is being raised as arbitrary by private respondent is the denial of prior notice and
hearing by the Monetary Board, a matter long settled in this jurisdiction, and not the
arbitrariness which the conclusions of the Supervision and Examination Sector (SES),
Department II, of the Central Bank were reached.
Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals,21 and reiterate Our
pronouncement therein that
. . . the law is explicit as to the conditions prerequisite to the action of the Monetary Board to
forbid the institution to do business in the Philippines and to appoint a receiver to immediately
take charge of the bank's assets and liabilities. They are: (a) an examination made by the
examining department of the Central Bank; (b) report by said department to the Monetary
Board; and (c) prima facie showing that its continuance in business would involve probable loss
to its depositors or creditors.
In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented;
hence, We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with
the Constitution in the exercise of police power of the state. Consequently, the absence of notice
and hearing is not a valid ground to annul a Monetary Board resolution placing a bank under
receivership. The absence of prior notice and hearing cannot be deemed acts of arbitrariness
and bad faith. Thus, an MB resolution placing a bank under receivership, or conservatorship for
that matter, may only be annulled after a determination has been made by the trial court that
its issuance was tainted with arbitrariness and bad faith. Until such determination is made, the
status quo shall be maintained, i.e., the bank shall continue to be under receivership.
270
As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank
is, to echo the respondent appellate court, "asking for the impossible, for it cannot be expected
that the master, the CB, will allow the receiver it has appointed to question that very
appointment." Consequently, only stockholders of a bank could file an action for annulment of
a Monetary Board resolution placing the bank under receivership and prohibiting it from
continuing operations.22 In Central Bank v. Court of Appeals, 23 We explained the purpose of
the law
. . . in requiring that only the stockholders of record representing the majority of the capital
stock may bring the action to set aside a resolution to place a bank under conservatorship is to
ensure that it be not frustrated or defeated by the incumbent Board of Directors or officers who
may immediately resort to court action to prevent its implementation or enforcement. It is
presumed that such a resolution is directed principally against acts of said Directors and officers
which place the bank in a state of continuing inability to maintain a condition of liquidity
adequate to protect the interest of depositors and creditors. Indirectly, it is likewise intended to
protect and safeguard the rights and interests of the stockholders. Common sense and public
policy dictate then that the authority to decide on whether to contest the resolution should be
lodged with the stockholders owning a majority of the shares for they are expected to be more
objective in determining whether the resolution is plainly arbitrary and issued in bad faith.
It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to
25 July 1987 when E.O. 289 was issued, to be effective sixty (60) days after its approval (Sec. 5).
The implication is that before E.O
. 289, any party in interest could institute court proceedings to question a Monetary Board
resolution placing a bank under receivership. Consequently, since the instant complaint was
filed by parties representing themselves to be officers of respondent Bank (Officer-in-Charge
and Vice President), the case before the trial court should now take its natural course. However,
after the effectivity of E.O. 289, the procedure stated therein should be followed and observed.
PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 is AFFIRMED,
except insofar as it upholds the Order of the trial court of 11 November 1985 directing petitioner
RAMON V. TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its elected Board
of Directors and Officers, which is hereby SET ASIDE.
Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to
determine whether the issuance of Resolution No. 596 of the Monetary Board was tainted with
arbitrariness and bad faith and to decide the case accordingly.
SO ORDERED.
G.R. No. 162270. April 06, 2005
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC., Petitioners,
vs.
THE MANILA BANKING CORPORATION, Respondents.
DECISION
GARCIA, J.:
Thru this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Abacus Real Estate Development Center, Inc. seeks to set aside the following
issuances of the Court of Appeals in CA-G.R. CV No. 64877, to wit:
1. Decision dated May 26, 2003,1 reversing an earlier decision of the Regional Trial Court at
Makati City, Branch 59, in an action for specific performance and damages thereat commenced
by the petitioner against the herein respondent Manila Banking Corporation; and
2. Resolution of February 17, 2004,2 denying petitioners motion for reconsideration.
The petition is casts against the following factual backdrop:
Respondent Manila Banking Corporation (Manila Bank, for brevity), owns a 1,435-square meter
parcel of land located along Gil Puyat Avenue Extension, Makati City and covered by Transfer
Certificate of Title (TCT) No. 132935 of the Registry of Deeds of Makati. Prior to 1984, the bank
began constructing on said land a 14-storey building. Not long after, however, the bank
encountered financial difficulties that rendered it unable to finish construction of the building.
On May 22, 1987, the Central Bank of the Philippines, now Bangko Sentral ng Pilipinas, ordered
the closure of Manila Bank and placed it under receivership, with Feliciano Miranda, Jr. being
initially appointed as Receiver. The legality of the closure was contested by the bank before the
proper court.
On November 11, 1988, the Central Bank, by virtue of Monetary Board (MB) Resolution No. 505,
ordered the liquidation of Manila Bank and designated Atty. Renan V. Santos as Liquidator. The
liquidation, however, was held in abeyance pending the outcome of the earlier suit filed by
Manila Bank regarding the legality of its closure. Consequently, the designation of Atty. Renan
V. Santos as Liquidator was amended by the Central Bank on December 22, 1988 to that of
Statutory Receiver.
271
In the interim, Manila Banks then acting president, the late Vicente G. Puyat, in a bid to save
the banks investment, started scouting for possible investors who could finance the completion
of the building earlier mentioned. On August 18, 1989, a group of investors, represented by
Calixto Y. Laureano (hereafter referred to as Laureano group), wrote Vicente G. Puyat offering
to lease the building for ten (10) years and to advance the cost to complete the same, with the
advanced cost to be amortized and offset against rental payments during the term of the lease.
Likewise, the letter-offer stated that in consideration of advancing the construction cost, the
group wanted to be given the "exclusive option to purchase" the building and the lot on which
it was constructed.
Since no disposition of assets could be made due to the litigation concerning Manila Banks
closure, an arrangement was thought of whereby the property would first be leased to Manila
Equities Corporation (MEQCO, for brevity), a wholly-owned subsidiary of Manila Bank, with
MEQCO thereafter subleasing the property to the Laureano group.
In a letter dated August 30, 1989, Vicente G. Puyat accepted the Laureano groups offer and
granted it an "exclusive option to purchase" the lot and building for One Hundred Fifty Million
Pesos (150,000,000.00). Later, or on October 31, 1989, the building was leased to MEQCO for
a period of ten (10) years pursuant to a contract of lease bearing that date. On March 1, 1990,
MEQCO subleased the property to petitioner Abacus Real Estate Development Center, Inc.
(Abacus, for short), a corporation formed by the Laureano group for the purpose, under identical
provisions as that of the October 31, 1989 lease contract between Manila Bank and MEQCO.
The Laureano group was, however, unable to finish the building due to the economic crisis
brought about by the failed December 1989 coup attempt. On account thereof, the Laureano
group offered its rights in Abacus and its "exclusive option to purchase" to Benjamin Bitanga
(Bitanga hereinafter), for Twenty Million Five Hundred Thousand Pesos (20,500,000.00).
Bitanga would later allege that because of the substantial amount involved, he first had to talk
with Atty. Renan Santos, the Receiver appointed by the Central Bank, to discuss Abacus offer.
Bitanga further alleged that, over lunch, Atty. Santos then verbally approved his entry into
Abacus and his take-over of the sublease and option to purchase.
On March 30, 1990, the Laureano group transferred and assigned to Bitanga all of its rights in
Abacus and the "exclusive option to purchase" the subject land and building.
On September 16, 1994, Abacus sent a letter to Manila Bank informing the latter of its desire to
exercise its "exclusive option to purchase". However, Manila Bank refused to honor the same.
Such was the state of things when, on November 10, 1995, in the Regional Trial Court (RTC) at
Makati, Abacus Real Estate Development Center, Inc. filed a complaint3 for specific performance
and damages against Manila Bank and/or the Estate of Vicente G. Puyat. In its complaint,
docketed as Civil Case No. 96-1638 and raffled to Branch 59 of the court, plaintiff Abacus prayed
for a judgment ordering Manila Bank, inter alia, to sell, transfer and convey unto it for
150,000,000.00 the land and building in dispute "free from all liens and encumbrances", plus
payment of damages and attorneys fees.
Subsequently, defendant Manila Bank, followed a month later by its co-defendant Estate of
Vicente G. Puyat, filed separate motions to dismiss the complaint.
In an Order dated April 15, 1996, the trial court granted the motion to dismiss filed by the Estate
of Vicente G. Puyat, but denied that of Manila Bank and directed the latter to file its answer.
Before plaintiff Abacus could adduce evidence but after pre-trial, defendant Manila Bank filed a
Motion for Partial Summary Judgment, followed by a Supplement to Motion for Partial Summary
Judgment. While initially opposed, Abacus would later join Manila Bank in submitting the case
for summary judgment.
Eventually, in a decision dated May 27, 1999,4 the trial court rendered judgment for Abacus in
accordance with the latters prayer in its complaint, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff as
follows:
1. Ordering the defendant [Manila Bank] to immediately sell to plaintiff the parcel of land and
building, with an area of 1,435 square meters and covered by TCT No. 132935 of the Makati
Registry of Deeds, situated along Sen. Gil J. Puyat Ave. in Makati City, at the price of One
Hundred Fifty Million (150,000.000.00) Pesos in accordance with the said exclusive option to
purchase, and to execute the appropriate deed of sale therefor in favor of plaintiff;
2. Ordering the defendant [Manila Bank] to pay plaintiff the amount of Two Million
(2,000,000.00) Pesos representing reasonable attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim, for lack of merit; and
4. With costs against the defendant.
SO ORDERED.
272
Its motion for reconsideration of the aforementioned decision having been denied by the trial
court in its Order of August 17, 1999,5 Manila Bank then went on to the Court of Appeals
whereat its appellate recourse was docketed as CA-G.R. CV No. 64877.
As stated at the threshold hereof, the Court of Appeals, in a decision dated May 26, 2003,6
reversed and set aside the appealed decision of the trial court, thus:
WHEREFORE, finding serious reversible error, the appeal is GRANTED.
The Decision dated May 27, 1999 of the Regional Trial Court of Makati City, Branch 59 is
REVERSED and SET ASIDE.
Cost of the appeal to be paid by the appellee.
SO ORDERED.
On June 25, 2003, Abacus filed a Motion for Reconsideration, followed, with leave of court, by
an Amended Motion for Reconsideration. Pending resolution of its motion for reconsideration,
as amended, Abacus filed a Motion to Dismiss Appeal,7 therein praying for the dismissal of
Manila Banks appeal from the RTC decision of May 27, 1999, contending that said appeal was
filed out of time.
In its Resolution of February 17, 2004,8 the appellate court denied Abacus aforementioned
motion for reconsideration.
Hence, this recourse by petitioner Abacus Real Estate Development Center, Inc.
As we see it, two (2) issues commend themselves for the resolution of the Court, namely:
WHETHER OR NOT RESPONDENT BANKS APPEAL TO THE COURT OF APPEALS WAS FILED ON
TIME; and
WHETHER OR NOT PETITIONER ABACUS HAS ACQUIRED THE RIGHT TO PURCHASE THE LOT AND
BUILDING IN QUESTION.
We rule for respondent Manila Bank on both issues.
Addressing the first issue, petitioner submits that respondent banks appeal to the Court of
Appeals from the adverse decision of the trial court was belatedly filed. Elaborating thereon,
petitioner alleges that respondent bank received a copy of the May 27, 1999 RTC decision on
June 22, 1999, hence, petitioner had 15 days, or only up to July 7, 1999 within which to take an
appeal from the same decision or move for a reconsideration thereof. Petitioner alleges that
respondent furnished the trial court with a copy of its Motion for Reconsideration only on July
7, 1999, the last day for filing an appeal. Under Section 3, Rule 41 of the 1997 Rules of Civil
Procedure, "the period of appeal shall be interrupted by a timely motion for new trial or
reconsideration". Since, according to petitioner, respondent filed its Motion for Reconsideration
on the last day of the period to appeal, it only had one (1) more day within which to file an
appeal, so much so that when it received on August 23, 1999 a copy of the trial courts order
denying its Motion for Reconsideration, respondent bank had only up to August 24, 1999 within
which to file the corresponding appeal. As respondent bank appealed the decision of the trial
court only on August 25, 1999, petitioner thus argues that respondents appeal was filed out of
time.
As a counterpoint, respondent alleges that it sent the trial court a copy of its Motion for
Reconsideration on July 6, 1999, through registered mail. Having sent a copy of its Motion for
Reconsideration to the trial court with still two (2) days left to appeal, respondent then claims
that its filing of an appeal on August 25, 1999, two (2) days after receiving the Order of the trial
court denying its Motion for Reconsideration, was within the reglementary period.
Agreeing with respondent, the appellate court declared that respondents appeal was filed on
time. Explained that court in its Resolution of February 17, 2004, denying petitioners motion
for reconsideration:
Firstly, the file copy of the motion for reconsideration contains the written annotations "Registry
Receipt No. 1633 Makati P.O. 7-6-99" in its page 13. The presence of the annotations proves
that the motion for reconsideration was truly filed by registered mail on July 6, 1999 through
registry receipt no. 1633.
Secondly, the appellants manifestation filed in the RTC personally on July 7, 1999 contains the
following self-explanatory statements, to wit:
2. Defendant [Manila Bank] also filed with this Honorable Court a Motion for Reconsideration
of the Decision dated 27 May 1999 promulgated by this Honorable Court in this case, and served
a copy thereof to the plaintiff, by registered mail yesterday, 6 July 1999, due to lack of material
time and messenger to effect personal service and filing.
3. In order for this Honorable Court to be able to review defendant [Manila Banks] Motion for
Reconsideration without awaiting the mailed copy, defendant [Manila Bank] is now furnishing
this Honorable Court with a copy of said motion, as well as the entry of appearance, by personal
service.
273

The aforecited reference in the manifestation to the mailing of the motion for reconsideration
on July 6, 1999, in light of the handwritten annotations adverted to herein, renders beyond
doubt the appellants insistence of filing through registered mail on July 6, 1999.
Thirdly, the registry return cards attached to the envelopes separately addressed and mailed to
the RTC and the appellees counsel, found in pages 728 and 729 of the rollo, indicate that the
contents were the motion for reconsideration and the formal entry of appearance. Although the
appellee argues that the handwritten annotations of what were contained by the envelopes at
the time of mailing was easily self-serving, the fact remains that the envelope addressed to the
appellees counsel appears thereon to have been received on July 6, 1999 ("7/6/99"), which
enhances the probability of the motion for reconsideration being mailed, hence filed, on July 6,
1999, as claimed by the appellant.
Fourthly, the certification issued on October 2, 2003 by Atty. Jayme M. Luy, Branch Clerk of
Court, Branch 59, RTC in Makati City, has no consequence because Atty. Luy based his data only
on page 3 of the 1995 Civil Case Docket Book without reference to the original records which
were already with the Court of Appeals.
Fifthly, since the appellant received the denial of the motion for reconsideration on August 23,
1999, it had until August 25, 1999 within which to perfect its appeal from the decision of the
RTC because 2 days remained in its reglementary period to appeal. It is not disputed that the
appellant filed its notice of appeal and paid the appellate court docket fees on August 25, 1999.
These circumstances preponderantly demonstrate that the appellants appeal was not late by
one day. (Emphasis in the original)
Petitioner would, however, contest the above findings of the appellate court, stating, among
other things, that if it were true that respondent filed its Motion for Reconsideration by
registered mail and then furnished the trial court with a copy of said Motion the very next day,
then the rollo should have had two copies of the Motion for Reconsideration in question.
Respondent, on the other hand, insists that it indeed filed a Motion for Reconsideration on July
6, 1999 through registered mail.
It is evident that the issue raised by petitioner relates to the correctness of the factual finding
of the Court of Appeals as to the precise date when respondent filed its motion for
reconsideration before the trial court. Such issue, however, is beyond the province of this Court
to review. It is not the function of the Court to analyze or weigh all over again the evidence or
premises supportive of such factual determination.9 The Court has consistently held that the
findings of the Court of Appeals and other lower courts are, as a rule, accorded great weight, if
not binding upon it,10 save for the most compelling and cogent reasons.11 As nothing in the
record indicates any of such exceptions, the factual conclusion of the appellate court that
respondent filed its appeal on time, supported as it is by substantial evidence, must be affirmed.
Going to the second issue, petitioner insists that the option to purchase the lot and building in
question granted to it by the late Vicente G. Puyat, then acting president of Manila Bank, was
binding upon the latter. On the other hand, respondent has consistently maintained that the
late Vicente G. Puyat had no authority to act for and represent Manila Bank, the latter having
been placed under receivership by the Central Bank at the time of the granting of the "exclusive
option to purchase."
There can be no quibbling that respondent Manila Bank was under receivership, pursuant to
Central Banks MB Resolution No. 505 dated May 22, 1987, at the time the late Vicente G. Puyat
granted the "exclusive option to purchase" to the Laureano group of investors. Owing to this
defining reality, the appellate court was correct in declaring that Vicente G. Puyat was without
authority to grant the exclusive option to purchase the lot and building in question. The
invocation by the appellate court of the following pronouncement in Villanueva vs. Court of
Appeals12 was apropos, to say the least:
the assets of the bank pass beyond its control into the possession and control of the receiver
whose duty it is to administer the assets for the benefit of the creditors of the bank. Thus, the
appointment of a receiver operates to suspend the authority of the bank and of its directors and
officers over its property and effects, such authority being reposed in the receiver, and in this
respect, the receivership is equivalent to an injunction to restrain the bank officers from
intermeddling with the property of the bank in any way.
With respondent bank having been already placed under receivership, its officers, inclusive of
its acting president, Vicente G. Puyat, were no longer authorized to transact business in
connection with the banks assets and property. Clearly then, the "exclusive option to purchase"
granted by Vicente G. Puyat was and still is unenforceable against Manila Bank.13
Petitioner, however, asseverates that the "exclusive option to purchase" was ratified by Manila
Banks receiver, Atty. Renan Santos, during a lunch meeting held with Benjamin Bitanga in March
1990.
Petitioners argument is tenuous at best. Concededly, a contract unenforceable for lack of
authority by one of the parties may be ratified by the person in whose name the contract was
executed. However, even assuming, in gratia argumenti, that Atty. Renan Santos, Manila Banks
receiver, approved the "exclusive option to purchase" granted by Vicente G. Puyat, the same
would still be of no force and effect.
274
 G.R. No. 70054 December 11, 1991
Section 29 of the Central Bank Act, as amended,14 pertinently provides:
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner,
Sec. 29. Proceedings upon insolvency. Whenever, upon examination by the head of the vs.
appropriate supervising and examining department or his examiners or agents into the THE MONETARY BOARD, CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, CARLOTA
condition of any banking institution, it shall be disclosed that the condition of the same is one P. VALENZUELA, ARNULFO B. AURELLANO and RAMON V. TIAOQUI, respondents.
of insolvency, or that its continuance in business would involve probable loss to its depositors
or creditors, it shall be the duty of the department head concerned forthwith, in writing, to G.R. No. 68878 December 11, 1991
inform the Monetary Board of the facts, and the Board may, upon finding the statements of the
department head to be true, forbid the institution to do business in the Philippines and shall BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner,
designate an official of the Central Bank as receiver to immediately take charge of its assets and vs.
liabilities, as expeditiously as possible collect and gather all the assets and administer the same HON. INTERMEDIATE APPELLATE COURT and CELESTINA S. PAHIMUNTUNG, assisted by her
for the benefit of its creditors, exercising all the powers necessary for these purposes including, husband, respondents.
but not limited to, bringing suits and foreclosing mortgages in the name of the banking
institution. (Emphasis supplied) G.R. No. 77255-58 December 11, 1991

Clearly, the receiver appointed by the Central Bank to take charge of the properties of Manila
Bank only had authority to administer the same for the benefit of its creditors. Granting or
approving an "exclusive option to purchase" is not an act of administration, but an act of strict
ownership, involving, as it does, the disposition of property of the bank. Not being an act of
administration, the so-called "approval" by Atty. Renan Santos amounts to no approval at all, a
bank receiver not being authorized to do so on his own.
TOP MANAGEMENT PROGRAMS CORPORATION AND PILAR DEVELOPMENT CORPORATION,
petitioners,
vs.
THE COURT OF APPEALS, The Executive Judge of the Regional Trial Court of Cavite, Ex-Officio
Sheriff REGALADO E. EUSEBIO, BANCO FILIPINO SAVINGS AND MORTGAGE BANK, CARLOTA P.
VALENZUELA AND SYCIP, SALAZAR, HERNANDEZ AND GATMAITAN, respondents.

For sure, Congress itself has recognized that a bank receiver only has powers of administration. G.R. No. 78766 December 11, 1991
Section 30 of the New Central Bank Act15 expressly provides that "[t]he receiver shall
immediately gather and take charge of all the assets and liabilities of the institution, administer EL GRANDE CORPORATION, petitioner,
the same for the benefit of its creditors, and exercise the general powers of a receiver under the vs.
Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or THE COURT OF APPEALS, THE EXECUTIVE JUDGE of The Regional Trial Court and Ex-Officio
commit any act that will involve the transfer or disposition of any asset of the institution" Sheriff REGALADO E. EUSEBIO, BANCO FILIPINO SAVINGS AND MORTGAGE BANK, CARLOTA P.
VALENZUELA AND SYCIP, SALAZAR, FELICIANO AND HERNANDEZ, respondents.
In all, respondent banks receiver was without any power to approve or ratify the "exclusive
option to purchase" granted by the late Vicente G. Puyat, who, in the first place, was himself G.R. No. 78767 December 11, 1991
bereft of any authority, to bind the bank under such exclusive option. Respondent Manila Bank
may not thus be compelled to sell the land and building in question to petitioner Abacus under METROPOLIS DEVELOPMENT CORPORATION, petitioner,
the terms of the latters "exclusive option to purchase". vs.
COURT OF APPEALS, CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, JR., CARLOTA
WHEREFORE, the instant petition is DENIED and the challenged issuances of the Court of Appeals P. VALENZUELA, ARNULFO AURELLANO AND RAMON TIAOQUI, respondents.
AFFIRMED.
G.R. No. 78894 December 11, 1991
Costs against petitioner. SO ORDERED.

275
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner
vs.
COURT OF APPEALS, THE CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, JR.,
CARLOTA P. VALENZUELA, ARNULFO B. AURELLANO AND RAMON TIAOQUI, respondents.
G.R. No. 81303 December 11, 1991
PILAR DEVELOPMENT CORPORATION, petitioner
vs.
COURT OF APPEALS, HON. MANUEL M. COSICO, in his capacity as Presiding Judge of Branch
136 of the Regional Trial Court of Makati, CENTRAL BANK OF THE PHILIPPINES AND CARLOTA
P. VALENZUELA, respondents.
G.R. No. 81304 December 11, 1991
BF HOMES DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, CENTRAL BANK AND CARLOTA P. VALENZUELA, respondents.
G.R. No. 90473 December 11, 1991
EL GRANDE DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, THE EXECUTIVE JUDGE of the Regional Trial Court of Cavite, CLERK
OF COURT and Ex-Officio Sheriff ADORACION VICTA, BANCO FILIPINO SAVINGS AND
MORTGAGE BANK, CARLOTA P. VALENZUELA AND SYCIP, SALAZAR, HERNANDEZ AND
GATMAITAN, respondents.
Panganiban, Benitez, Barinaga & Bautista Law Offices collaborating counsel for petitioner.
Florencio T. Domingo, Jr. and Crisanto S. Cornejo for intervenors.
MEDIALDEA, J.:
This refers to nine (9) consolidated cases concerning the legality of the closure and receivership
of petitioner Banco Filipino Savings and Mortgage Bank (Banco Filipino for brevity) pursuant to
the order of respondent Monetary Board. Six (6) of these cases, namely, G.R. Nos. 68878, 77255-
68, 78766, 81303, 81304 and 90473 involve the common issue of whether or not the liquidator
appointed by the respondent Central Bank (CB for brevity) has the authority to prosecute as well
as to defend suits, and to foreclose mortgages for and in behalf of the bank while the issue on
the validity of the receivership and liquidation of the latter is pending resolution in G.R. No.
7004. Corollary to this issue is whether the CB can be sued to fulfill financial commitments of a
closed bank pursuant to Section 29 of the Central Bank Act. On the other hand, the other three
(3) cases, namely, G.R. Nos. 70054, which is the main case, 78767 and 78894 all seek to annul
and set aside M.B. Resolution No. 75 issued by respondents Monetary Board and Central Bank
on January 25, 1985.
The antecedent facts of each of the nine (9) cases are as follows:
G.R No. 68878
This is a motion for reconsideration, filed by respondent Celestina Pahimuntung, of the decision
promulgated by thisCourt on April 8, 1986, granting the petition for review on certiorari and
reversing the questioned decision of respondent appellate court, which annulled the writ of
possession issued by the trial court in favor of petitioner.
The respondent-movant contends that the petitioner has no more personality to continue
prosecuting the instant case considering that petitioner bank was placed under receivership
since January 25, 1985 by the Central Bank pursuant to the resolution of the Monetary Board.
G.R. Nos. 77255-58
Petitioners Top Management Programs Corporation (Top Management for brevity) and Pilar
Development Corporation (Pilar Development for brevity) are corporations engaged in the
business of developing residential subdivisions.
Top Management obtained a loan of P4,836,000 from Banco Filipino as evidenced by a
promissory note dated January 7, 1982 payable in three years from date. The loan was secured
by real estate mortgage in its various properties in Cavite. Likewise, Pilar Development obtained
loans from Banco Filipino between 1982 and 1983 in the principal amounts of P6,000,000,
P7,370,000 and P5,300,000 with maturity dates on December 28, 1984, January 5, 1985 and
February 16, 1984, respectively. To secure the loan, Pilar Development mortgaged to Banco
Filipino various properties in Dasmarias, Cavite.
On January 25, 1985, the Monetary Board issued a resolution finding Banco Filipino insolvent
and unable to do business without loss to its creditors and depositors. It placed Banco Filipino
under receivership of Carlota Valenzuela, Deputy Governor of the Central Bank.
276

On March 22, 1985, the Monetary Board issued another resolution placing the bank under
liquidation and designating Valenzuela as liquidator. By virtue of her authority as liquidator,
Valenzuela appointed the law firm of Sycip, Salazar, et al. to represent Banco Filipino in all
litigations.
On March 26, 1985, Banco Filipino filed the petition for certiorari in G.R. No. 70054 questioning
the validity of the resolutions issued by the Monetary Board authorizing the receivership and
liquidation of Banco Filipino.
In a resolution dated August 29, 1985, this Court in G.R. No. 70054 resolved to issue a temporary
restraining order, effective during the same period of 30 days, enjoining the respondents from
executing further acts of liquidation of the bank; that acts such as receiving collectibles and
receivables or paying off creditors' claims and other transactions pertaining to normal
operations of a bank are not enjoined. The Central Bank is ordered to designate a comptroller
for Banco Filipino.
Subsequently, Top Management failed to pay its loan on the due date. Hence, the law firm of
Sycip, Salazar, et al. acting as counsel for Banco Filipino under authority of Valenzuela as
liquidator, applied for extra-judicial foreclosure of the mortgage over Top Management's
properties. Thus, the Ex-Officio Sheriff of the Regional Trial Court of Cavite issued a notice of
extra-judicial foreclosure sale of the properties on December 16, 1985.
On December 9, 1985, Top Management filed a petition for injunction and prohibition with the
respondent appellate court docketed as CA-G.R. SP No. 07892 seeking to enjoin the Regional
Trial Court of Cavite, the ex-officio sheriff of said court and Sycip, Salazar, et al. from proceeding
with foreclosure sale.
Similarly, Pilar Development defaulted in the payment of its loans. The law firm of Sycip, Salazar,
et al. filed separate applications with the ex-officio sheriff of the Regional Trial Court of Cavite
for the extra-judicial foreclosure of mortgage over its properties.
Hence, Pilar Development filed with the respondent appellate court a petition for prohibition
with prayer for the issuance of a writ of preliminary injunction docketed as CA-G.R SP Nos.
08962-64 seeking to enjoin the same respondents from enforcing the foreclosure sale of its
properties. CA-G.R. SP Nos. 07892 and 08962-64 were consolidated and jointly decided.
On October 30, 1986, the respondent appellate court rendered a decision dismissing the
aforementioned petitions.
Hence, this petition was filed by the petitioners Top Management and Pilar Development
alleging that Carlota Valenzuela, who was appointed by the Monetary Board as liquidator of
Banco Filipino, has no authority to proceed with the foreclosure sale of petitioners' properties
on the ground that the resolution of the issue on the validity of the closure and liquidation of
Banco Filipino is still pending with this Court in G.R. 70054.
G.R. No. 78766
Petitioner El Grande Development Corporation (El Grande for brevity) is engaged in the business
of developing residential subdivisions. It was extended by respondent Banco Filipino a credit
accommodation to finance its housing program. Hence, petitioner was granted a loan in the
amount of P8,034,130.00 secured by real estate mortgages on its various estates located in
Cavite.
On January 15, 1985, the Monetary Board forbade Banco Filipino to do business, placed it under
receivership and designated Deputy Governor Carlota Valenzuela as receiver. On March 22,
1985, the Monetary Board confirmed Banco Filipino's insolvency and designated the receiver
Carlota Valenzuela as liquidator.
When petitioner El Grande failed to pay its indebtedness to Banco Filipino, the latter thru its
liquidator, Carlota Valenzuela, initiated the foreclosure with the Clerk of Court and Ex-officio
sheriff of RTC Cavite. Subsequently, on March 31, 1986, the ex-officio sheriff issued the notice
of extra-judicial sale of the mortgaged properties of El Grande scheduled on April 30, 1986.
In order to stop the public auction sale, petitioner El Grande filed a petition for prohibition with
the Court of Appeals alleging that respondent Carlota Valenzuela could not proceed with the
foreclosure of its mortgaged properties on the ground that this Court in G.R. No. 70054 issued
a resolution dated August 29, 1985, which restrained Carlota Valenzuela from acting as
liquidator and allowed Banco Filipino to resume banking operations only under a Central Bank
comptroller.
On March 2, 1987, the Court of Appeals rendered a decision dismissing the petition.
Hence this petition for review on certiorari was filed alleging that the respondent court erred
when it held in its decision that although Carlota P. Valenzuela was restrained by this Honorable
Court from exercising acts in liquidation of Banco Filipino Savings & Mortgage Bank, she was not
legally precluded from foreclosing the mortgage over the properties of the petitioner through
counsel retained by her for the purpose.
G.R. No. 81303
277

On November 8, 1985, petitioner Pilar Development Corporation (Pilar Development for brevity)
filed an action against Banco Filipino, the Central Bank and Carlota Valenzuela for specific
performance, docketed as Civil Case No. 12191. It appears that the former management of
Banco Filipino appointed Quisumbing & Associates as counsel for Banco Filipino. On June 12,
1986 the said law firm filed an answer for Banco Filipino which confessed judgment against
Banco Filipino.
On June 17, 1986, petitioner filed a second amended complaint. The Central Bank and Carlota
Valenzuela, thru the law firm Sycip, Salazar, Hernandez and Gatmaitan filed an answer to the
complaint.
On June 23, 1986, Sycip, et al., acting for all the defendants including Banco Filipino moved that
the answer filed by Quisumbing & Associates for defendant Banco Filipino be expunged from
the records. Despite opposition from Quisumbing & Associates, the trial court granted the
motion to expunge in an order dated March 17, 1987. Petitioner Pilar Development moved to
reconsider the order but the motion was denied.
Petitioner Pilar Development filed with the respondent appellate court a petition for certiorari
and mandamus to annul the order of the trial court. The Court of Appeals rendered a decision
dismissing the petition. A petition was filed with this Court but was denied in a resolution dated
March 22, 1988. Hence, this instant motion for reconsideration.
G.R. No. 81304
On July 9, 1985, petitioner BF Homes Incorporated (BF Homes for brevity) filed an action with
the trial court to compel the Central Bank to restore petitioner's; financing facility with Banco
Filipino.
The Central Bank filed a motion to dismiss the action. Petitioner BF Homes in a supplemental
complaint impleaded as defendant Carlota Valenzuela as receiver of Banco Filipino Savings and
Mortgage Bank.
On April 8, 1985, petitioner filed a second supplemental complaint to which respondents filed a
motion to dismiss.
On July 9, 1985, the trial court granted the motion to dismiss the supplemental complaint on
the grounds (1) that plaintiff has no contractual relation with the defendants, and (2) that the
Intermediate Appellate Court in a previous decision in AC-G.R. SP. No. 04609 had stated that
Banco Filipino has been ordered closed and placed under receivership pending liquidation, and
thus, the continuation of the facility sued for by the plaintiff has become legally impossible and
the suit has become moot.
The order of dismissal was appealed by the petitioner to the Court of Appeals. On November 4,
1987, the respondent appellate court dismissed the appeal and affirmed the order of the trial
court.
Hence, this petition for review on certiorari was filed, alleging that the respondent court erred
when it found that the private respondents should not be the ones to respond to the cause of
action asserted by the petitioner and the petitioner did not have any cause of action against the
respondents Central Bank and Carlota Valenzuela.
G.R. No. 90473
Petitioner El Grande Development Corporation (El Grande for brevity) obtained a loan from
Banco Filipino in the amount of P8,034,130.00, secured by a mortgage over its five parcels of
land located in Cavite which were covered by Transfer Certificate of Title Nos. T-82187, T-
109027, T-132897, T-148377, and T-79371 of the Registry of Deeds of Cavite.
When Banco Filipino was ordered closed and placed under receivership in 1985, the appointed
liquidator of BF, thru its counsel Sycip, Salazar, et al. applied with the ex-officio sheriff of the
Regional Trial Court of Cavite for the extrajudicial foreclosure of the mortgage constituted over
petitioner's properties. On March 24, 1986, the ex-officio sheriff issued a notice of extrajudicial
foreclosure sale of the properties of petitioner.
Thus, petitioner filed with the Court of Appeals a petition for prohibition with prayer for writ of
preliminary injunction to enjoin the respondents from foreclosing the mortgage and to nullify
the notice of foreclosure.
On June 16, 1989, respondent Court of Appeals rendered a decision dismissing the petition.
Not satisfied with the decision, petitioner filed the instant petition for review on certiorari.
G.R. No. 70054
Banco Filipino Savings and Mortgage Bank was authorized to operate as such under M.B.
Resolution No. 223 dated February 14, 1963. It commenced operations on July 9, 1964. It has
eighty-nine (89) operating branches, forty-six (46) of which are in Manila, with more than three
(3) million depositors.
278
As of July 31, 1984, the list of stockholders showed the major stockholders to be: Metropolis
Development Corporation, Apex Mortgage and Loans Corporation, Filipino Business
Consultants, Tiu Family Group, LBH Inc. and Anthony Aguirre.
Petitioner Bank had an approved emergency advance of P119.7 million under M.B. Resolution
No. 839 dated June 29, 1984. This was augmented with a P3 billion credit line under M.B.
Resolution No. 934 dated July 27, 1984.
On the same date, respondent Board issued M.B. Resolution No. 955 placing petitioner bank
under conservatorship of Basilio Estanislao. He was later replaced by Gilberto Teodoro as
conservator on August 10, 1984. The latter submitted a report dated January 8, 1985 to
respondent Board on the conservatorship of petitioner bank, which report shall hereinafter be
referred to as the Teodoro report.
Subsequently, another report dated January 23, 1985 was submitted to the Monetary Board by
Ramon Tiaoqui, Special Assistant to the Governor and Head, SES Department II of the Central
Bank, regarding the major findings of examination on the financial condition of petitioner BF as
of July 31, 1984. The report, which shall be referred to herein as the Tiaoqui Report contained
the following conclusion and recommendation:
The examination findings as of July 31, 1984, as shown earlier, indicate one of insolvency and
illiquidity and further confirms the above conclusion of the Conservator.
All the foregoing provides sufficient justification for forbidding the bank from engaging in
banking.
Foregoing considered, the following are recommended:
1. Forbid the Banco Filipino Savings & Mortgage Bank to do business in the Philippines
effective the beginning of office January 1985, pursuant to Sec. 29 of R.A No. 265, as amended;
2. Designate the Head of the Conservator Team at the bank, as Receiver of Banco Filipino
Savings & Mortgage Bank, to immediately take charge of the assets and liabilities, as
expeditiously as possible collect and gather all the assets and administer the same for the
benefit of all the creditors, and exercise all the powers necessary for these purposes including
but not limited to bringing suits and foreclosing mortgages in the name of the bank.
3. The Board of Directors and the principal officers from Senior Vice Presidents, as listed
in the attached Annex "A" be included in the watchlist of the Supervision and Examination Sector
until such time that they shall have cleared themselves.
4. Refer to the Central Bank's Legal Department and Office of Special Investigation the
report on the findings on Banco Filipino for investigation and possible prosecution of directors,
officers, and employees for activities which led to its insolvent position. (pp- 61-62, Rollo)
On January 25, 1985, the Monetary Board issued the assailed MB Resolution No. 75 which
ordered the closure of BF and which further provides:
After considering the report dated January 8, 1985 of the Conservator for Banco Filipino Savings
and Mortgage Bank that the continuance in business of the bank would involve probable loss to
its depositors and creditors, and after discussing and finding to be true the statements of the
Special Assistant to the Governor and Head, Supervision and Examination Sector (SES)
Department II as recited in his memorandum dated January 23, 1985, that the Banco Filipino
Savings & Mortgage Bank is insolvent and that its continuance in business would involve
probable loss to its depositors and creditors, and in pursuance of Sec. 29 of RA 265, as amended,
the Board decided:
1. To forbid Banco Filipino Savings and Mortgage Bank and all its branches to do business
in the Philippines;
2. To designate Mrs. Carlota P. Valenzuela, Deputy Governor as Receiver who is hereby
directly vested with jurisdiction and authority to immediately take charge of the bank's assets
and liabilities, and as expeditiously as possible collect and gather all the assets and administer
the same for the benefit of its creditors, exercising all the powers necessary for these purposes
including but not limited to, bringing suits and foreclosing mortgages in the name of the bank;
3. To designate Mr. Arnulfo B. Aurellano, Special Assistant to the Governor, and Mr.
Ramon V. Tiaoqui, Special Assistant to the Governor and Head, Supervision and Examination
Sector Department II, as Deputy Receivers who are likewise hereby directly vested with
jurisdiction and authority to do all things necessary or proper to carry out the functions
entrusted to them by the Receiver and otherwise to assist the Receiver in carrying out the
functions vested in the Receiver by law or Monetary Board Resolutions;
4. To direct and authorize Management to do all other things and carry out all other
measures necessary or proper to implement this Resolution and to safeguard the interests of
depositors, creditors and the general public; and
5. In consequence of the foregoing, to terminate the conservatorship over Banco Filipino
Savings and Mortgage Bank. (pp. 10-11, Rollo, Vol. I)
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On February 2, 1985, petitioner BF filed a complaint docketed as Civil Case No. 9675 with the
Regional Trial Court of Makati to set aside the action of the Monetary Board placing BF under
receivership.
On February 28, 1985, petitioner filed with this Court the instant petition for certiorari and
mandamus under Rule 65 of the Rules of Court seeking to annul the resolution of January 25,
1985 as made without or in excess of jurisdiction or with grave abuse of discretion, to order
respondents to furnish petitioner with the reports of examination which led to its closure and
to afford petitioner BF a hearing prior to any resolution that may be issued under Section 29 of
R.A. 265, also known as Central Bank Act.
On March 19, 1985, Carlota Valenzuela, as Receiver and Arnulfo Aurellano and Ramon Tiaoqui
as Deputy Receivers of Banco Filipino submitted their report on the receivership of BF to the
Monetary Board, in compliance with the mandate of Sec. 29 of R.A. 265 which provides that the
Monetary Board shall determine within sixty (60) days from date of receivership of a bank
whether such bank may be reorganized/permitted to resume business or ordered to be
liquidated. The report contained the following recommendation:
In view of the foregoing and considering that the condition of the banking institution continues
to be one of insolvency, i.e., its realizable assets are insufficient to meet all its liabilities and that
the bank cannot resume business with safety to its depositors, other creditors and the general
public, it is recommended that:
1. Banco Filipino Savings & Mortgage Bank be liquidated pursuant to paragraph 3, Sec. 29
of RA No. 265, as amended;
2. The Legal Department, through the Solicitor General, be authorized to file in the proper
court a petition for assistance in th liquidation of the Bank;
3. The Statutory Receiver be designated as the Liquidator of said bank; and
4. Management be instructed to inform the stockholders of Banco Filipino Savings &
Mortgage Bank of the Monetary Board's decision liquidate the Bank. (p. 167, Rollo, Vol. I)
On July 23, 1985, petitioner filed a motion before this Court praying that a restraining order or
a writ of preliminary injunction be issued to enjoin respondents from causing the dismantling of
BF signs in its main office and 89 branches. This Court issued a resolution on August 8, 1985
ordering the issuance of the aforesaid temporary restraining order.
On August 20, 1985, the case was submitted for resolution.
In a resolution dated August 29, 1985, this Court Resolved direct the respondents Monetary
Board and Central Bank hold hearings at which the petitioner should be heard, and terminate
such hearings and submit its resolution within thirty (30) days. This Court further resolved to
issue a temporary restraining order enjoining the respondents from executing further acts of
liquidation of a bank. Acts such as receiving collectibles and receivables or paying off creditors'
claims and other transactions pertaining to normal operations of a bank were no enjoined. The
Central Bank was also ordered to designate comptroller for the petitioner BF. This Court also
ordered th consolidation of Civil Cases Nos. 8108, 9676 and 10183 in Branch 136 of the Regional
Trial Court of Makati.
However, on September 12, 1985, this Court in the meantime suspended the hearing it ordered
in its resolution of August 29, 1985.
On October 8, 1985, this Court submitted a resolution order ing Branch 136 of the Regional Trial
Court of Makati the presided over by Judge Ricardo Francisco to conduct the hear ing
contemplated in the resolution of August 29, 1985 in the most expeditious manner and to
submit its resolution to this Court.
In the Court's resolution of February 19, 1987, the Court stated that the hearing contemplated
in the resolution of August 29, 1985, which is to ascertain whether substantial administrative
due process had been observed by the respondent Monetary Board, may be expedited by Judge
Manuel Cosico who now presides the court vacated by Judge Ricardo Francisco, who was
elevated to the Court of Appeals, there being no legal impediment or justifiable reason to bar
the former from conducting such hearing. Hence, this Court directed Judge Manuel Cosico to
expedite the hearing and submit his report to this Court.
On February 20, 1988, Judge Manuel Cosico submitted his report to this Court with the
recommendation that the resolutions of respondents Monetary Board and Central Bank
authorizing the closure and liquidation of petitioner BP be upheld.
On October 21, 1988, petitioner BF filed an urgent motion to reopen hearing to which
respondents filed their comment on December 16, 1988. Petitioner filed their reply to
respondent's comment of January 11, 1989. After having deliberated on the grounds raised in
the pleadings, this Court in its resolution dated August 3, 1989 declared that its intention as
expressed in its resolution of August 29, 1985 had not been faithfully adhered to by the herein
petitioner and respondents. The aforementioned resolution had ordered a healing on the
reports that led respondents to order petitioner's closure and its alleged pre-planned
liquidation. This Court noted that during the referral hearing however, a different scheme was
followed. Respondents merely submitted to the commissioner their findings on the
280
examinations conducted on petitioner, affidavits of the private respondents relative to the
findings, their reports to the Monetary Board and several other documents in support of their
position while petitioner had merely submitted objections to the findings of respondents,
counter-affidavits of its officers and also documents to prove its claims. Although the records
disclose that both parties had not waived cross-examination of their deponents, no such cross-
examination has been conducted. The reception of evidence in the form of affidavits was
followed throughout, until the commissioner submitted his report and recommendations to the
Court. This Court also held that the documents pertinent to the resolution of the instant petition
are the Teodoro Report, Tiaoqui Report, Valenzuela, Aurellano and Tiaoqui Report and the
supporting documents which were made as the bases by the reporters of their conclusions
contained in their respective reports. This Court also Resolved in its resolution to re-open the
referral hearing that was terminated after Judge Cosico had submitted his report and
recommendation with the end in view of allowing petitioner to complete its presentation of
evidence and also for respondents to adduce additional evidence, if so minded, and for both
parties to conduct the required cross-examination of witnesses/deponents, to be done within a
period of three months. To obviate all doubts on Judge Cosico's impartiality, this Court
designated a new hearing commissioner in the person of former Judge Consuelo Santiago of the
Regional Trial Court, Makati, Branch 149 (now Associate Justice of the Court of Appeals).
Three motions for intervention were filed in this case as follows: First, in G.R. No. 70054 filed by
Eduardo Rodriguez and Fortunate M. Dizon, stockholders of petitioner bank for and on behalf
of other stockholders of petitioner; second, in G.R. No. 78894, filed by the same stockholders,
and, third, again in G.R. No. 70054 by BF Depositors' Association and others similarly situated.
This Court, on March 1, 1990, denied the aforesaid motions for intervention.
On January 28, 1991, the hearing commissioner, Justice Consuelo Santiago of the Court of
Appeals submitted her report and recommendation (to be hereinafter called, "Santiago Report")
on the following issues stated therein as follows:
l) Had the Monetary Board observed the procedural requirements laid down in Sec. 29 of
R.A. 265, as amended to justify th closure of the Banco Filipino Savings and Mortgage Bank?
2) On the date of BF's closure (January 25, 1985) was its condition one of insolvency or
would its continuance in business involve probable loss to its depositors or creditors?
The commissioner after evaluation of the evidence presented found and recommended the
following:
1. That the TEODORO and TIAOQUI reports did not establish in accordance with See. 29 of
the R.A. 265, as amended, BF's insolvency as of July 31, 1984 or that its continuance in business
thereafter would involve probable loss to its depositors or creditors. On the contrary, the
evidence indicates that BF was solvent on July 31, 1984 and that on January 25, 1985, the day it
was closed, its insolvency was not clearly established;
2. That consequently, BF's closure on January 25, 1985, not having satisfied the
requirements prescribed under Sec. 29 of RA 265, as amended, was null and void.
3. That accordingly, by way of correction, BF should be allowed to re-open subject to such
laws, rules and regulations that apply to its situation.
Respondents thereafter filed a motion for leave to file objections to the Santiago Report. In the
same motion, respondents requested that the report and recommendation be set for oral
argument before the Court. On February 7, 1991, this Court denied the request for oral
argument of the parties.
On February 25, 1991, respondents filed their objections to the Santiago Report. On March 5,
1991, respondents submitted a motion for oral argument alleging that this Court is confronted
with two conflicting reports on the same subject, one upholding on all points the Monetary
Board's closure of petitioner, (Cosico Report dated February 19, 1988) and the other (Santiago
Report dated January 25, 1991) holding that petitioner's closure was null and void because
petitioner's insolvency was not clearly established before its closure; and that such a hearing on
oral argrument will therefore allow the parties to directly confront the issues before this Court.
On March 12, 1991 petitioner filed its opposition to the motion for oral argument. On March 20,
1991, it filed its reply to respondents' objections to the Santiago Report.
On June 18, 1991, a hearing was held where both parties were heard on oral argument before
this Court. The parties, having submitted their respective memoranda, the case is now
submitted for decision.
G.R. No. 78767
On February 2, 1985, Banco Filipino filed a complaint with the trial court docketed as Civil Case
No. 9675 to annul the resolution of the Monetary Board dated January 25, 1985, which ordered
the closure of the bank and placed it under receivership.
On February 14, 1985, the Central Bank and the receivers filed a motion to dismiss the complaint
on the ground that the receivers had not authorized anyone to file the action. In a supplemental
motion to dismiss, the Central Bank cited the resolution of this Court dated October 15, 1985 in
G.R. No. 65723 entitled, "Central Bank et al. v. Intermediate Appellate Court" whereby We held
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that a complaint questioning the validity of the receivership established by the Central Bank
becomes moot and academic upon the initiation of liquidation proceedings.
While the motion to dismiss was pending resolution, petitioner herein Metropolis Development
Corporation (Metropolis for brevity) filed a motion to intervene in the aforestated civil case on
the ground that as a stockholder and creditor of Banco Filipino, it has an interest in the subject
of the action.
On July 19, 1985, the trial court denied the motion to dismiss and also denied the motion for
reconsideration of the order later filed by Central Bank. On June 5, 1985, the trial court allowed
the motion for intervention.
Hence, the Central Bank and the receivers of Banco Filipino filed a petition for certiorari with
the respondent appellate court alleging that the trial court committed grave abuse of discretion
in not dismissing Civil Case No. 9675.
On March 17, 1986, the respondent appellate court rendered a decision annulling and setting
aside the questioned orders of the trial court, and ordering the dismissal of the complaint filed
by Banco Filipino with the trial court as well as the complaint in intervention of petitioner
Metropolis Development Corporation.
Hence this petition was filed by Metropolis Development Corporation questioning the decision
of the respondent appellate court.
G.R. No. 78894
On February 2, 1985, a complaint was filed with the trial court in the name of Banco Filipino to
annul the resolution o the Monetary Board dated January 25, 1985 which ordered the closure
of Banco Filipino and placed it under receivership. The receivers appointed by the Monetary
Board were Carlota Valenzuela, Arnulfo Aurellano and Ramon Tiaoqui.
On February 14, 1985, the Central Bank and the receiver filed a motion to dismiss the complaint
on the ground that the receiver had not authorized anyone to file the action.
On March 22, 1985, the Monetary Board placed the bank under liquidation and designated
Valenzuela as liquidator and Aurellano and Tiaoqui as deputy liquidators.
The Central Bank filed a supplemental motion to dismiss which was denied. Hence, the latter
filed a petition for certiorari with the respondent appellate court to set aside the order of the
trial court denying the motion to dismiss. On March 17, 1986, the respondent appellate court
granted the petition and dismissed the complaint of Banco Filipino with the trial court.
Thus, this petition for certiorari was filed with the petitioner contending that a bank which has
been closed and placed under receivership by the Central Bank under Section 29 of RA 265 could
file suit in court in its name to contest such acts of the Central Bank, without the authorization
of the CB-appointed receiver.
After deliberating on the pleadings in the following cases:
1. In G.R. No. 68878, the respondent's motion for reconsideration;
2. In G.R. Nos. 77255-58, the petition, comment, reply, rejoinder and sur-rejoinder;
2. In G.R. No. 78766, the petition, comment, reply and rejoinder;
3. In G.R. No. 81303, the petitioner's motion for reconsideration;
4. In G.R.No. 81304, the petition, comment and reply;
5. Finally, in G.R. No. 90473, the petition comment and reply.
We find the motions for reconsideration in G.R. Nos. 68878 and 81303 and the petitions in G.R.
Nos. 77255-58, 78766, 81304 and 90473 devoid of merit.
Section 29 of the Republic Act No. 265, as amended known as the Central Bank Act, provides
that when a bank is forbidden to do business in the Philippines and placed under receivership,
the person designated as receiver shall immediately take charge of the bank's assets and
liabilities, as expeditiously as possible, collect and gather all the assets and administer the same
for the benefit of its creditors, and represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution, exercising all the powers
necessary for these purposes including, but not limited to, bringing and foreclosing mortgages
in the name of the bank. If the Monetary Board shall later determine and confirm that banking
institution is insolvent or cannot resume business safety to depositors, creditors and the general
public, it shall, public interest requires, order its liquidation and appoint a liquidator who shall
take over and continue the functions of receiver previously appointed by Monetary Board. The
liquid for may, in the name of the bank and with the assistance counsel as he may retain,
institute such actions as may necessary in the appropriate court to collect and recover a counts
and assets of such institution or defend any action ft against the institution.
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When the issue on the validity of the closure and receivership of Banco Filipino bank was raised
in G.R. No. 70054, pendency of the case did not diminish the powers and authority of the
designated liquidator to effectuate and carry on the a ministration of the bank. In fact when We
adopted a resolute on August 25, 1985 and issued a restraining order to respondents Monetary
Board and Central Bank, We enjoined me further acts of liquidation. Such acts of liquidation, as
explained in Sec. 29 of the Central Bank Act are those which constitute the conversion of the
assets of the banking institution to money or the sale, assignment or disposition of the s to
creditors and other parties for the purpose of paying debts of such institution. We did not
prohibit however acts a as receiving collectibles and receivables or paying off credits claims and
other transactions pertaining to normal operate of a bank. There is no doubt that the
prosecution of suits collection and the foreclosure of mortgages against debtors the bank by the
liquidator are among the usual and ordinary transactions pertaining to the administration of a
bank. their did Our order in the same resolution dated August 25, 1985 for the designation by
the Central Bank of a comptroller Banco Filipino alter the powers and functions; of the liquid
insofar as the management of the assets of the bank is concerned. The mere duty of the
comptroller is to supervise counts and finances undertaken by the liquidator and to d mine the
propriety of the latter's expenditures incurred behalf of the bank. Notwithstanding this, the
liquidator is empowered under the law to continue the functions of receiver is preserving and
keeping intact the assets of the bank in substitution of its former management, and to prevent
the dissipation of its assets to the detriment of the creditors of the bank. These powers and
functions of the liquidator in directing the operations of the bank in place of the former
management or former officials of the bank include the retaining of counsel of his choice in
actions and proceedings for purposes of administration.
Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473, the liquidator by himself or through
counsel has the authority to bring actions for foreclosure of mortgages executed by debtors in
favor of the bank. In G.R. No. 81303, the liquidator is likewise authorized to resist or defend suits
instituted against the bank by debtors and creditors of the bank and by other private persons.
Similarly, in G.R. No. 81304, due to the aforestated reasons, the Central Bank cannot be
compelled to fulfill financial transactions entered into by Banco Filipino when the operations of
the latter were suspended by reason of its closure. The Central Bank possesses those powers
and functions only as provided for in Sec. 29 of the Central Bank Act.
While We recognize the actual closure of Banco Filipino and the consequent legal effects thereof
on its operations, We cannot uphold the legality of its closure and thus, find the petitions in G.R.
Nos. 70054, 78767 and 78894 impressed with merit. We hold that the closure and receivership
of petitioner bank, which was ordered by respondent Monetary Board on January 25, 1985, is
null and void.
It is a well-recognized principle that administrative and discretionary functions may not be
interfered with by the courts. In general, courts have no supervising power over the proceedings
and actions of the administrative departments of the government. This is generally true with
respect to acts involving the exercise of judgment or discretion, and findings of fact. But when
there is a grave abuse of discretion which is equivalent to a capricious and whimsical exercise of
judgment or where the power is exercised in an arbitrary or despotic manner, then there is a
justification for the courts to set aside the administrative determination reached (Lim, Sr. v.
Secretary of Agriculture and Natural Resources, L-26990, August 31, 1970, 34 SCRA 751)
The jurisdiction of this Court is called upon, once again, through these petitions, to undertake
the delicate task of ascertaining whether or not an administrative agency of the government,
like the Central Bank of the Philippines and the Monetary Board, has committed grave abuse of
discretion or has acted without or in excess of jurisdiction in issuing the assailed order. Coupled
with this task is the duty of this Court not only to strike down acts which violate constitutional
protections or to nullify administrative decisions contrary to legal mandates but also to prevent
acts in excess of authority or jurisdiction, as well as to correct manifest abuses of discretion
committed by the officer or tribunal involved.
The law applicable in the determination of these issues is Section 29 of Republic Act No. 265, as
amended, also known as the Central Bank Act, which provides:
SEC. 29. Proceedings upon insolvency. Whenever, upon examination by the head of the
appropriate supervising or examining department or his examiners or agents into the condition
of any bank or non-bank financial intermediary performing quasi-banking functions, it shall be
disclosed that the condition of the same is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, it shall be the duty of the department
head concerned forthwith, in writing, to inform the Monetary Board of the facts. The Board may,
upon finding the statements of the department head to be true, forbid the institution to do
business in the Philippines and designate an official of the Central Bank or a person of recognized
competence in banking or finance, as receiver to immediately take charge of its assets and
liabilities, as expeditiously as possible collect and gather all the assets and administer the same
for the benefit's of its creditors, and represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution, exercising all the powers
necessary for these purposes including, but not limited to, bringing and foreclosing mortgages
in the name of the bank or non-bank financial intermediary performing quasi-banking functions.
The Monetary Board shall thereupon determine within sixty days whether the institution may
be reorganized or otherwise placed in such a condition so that it may be permitted to resume
business with safety to its depositors and creditors and the general public and shall prescribe
the conditions under which such resumption of business shall take place as well as the time for
283
fulfillment of such conditions. In such case, the expenses and fees in the collection and
administration of the assets of the institution shall be determined by the Board and shall be paid
to the Central Bank out of the assets of such institution.
If the Monetary Board shall determine and confirm within the said period that the bank or non-
bank financial intermediary performing quasi-banking functions is insolvent or cannot resume
business with safety to its depositors, creditors, and the general public, it shall, if the public
interest requires, order its liquidation, indicate the manner of its liquidation and approve a
liquidation plan which may, when warranted, involve disposition of any or all assets in
consideration for the assumption of equivalent liabilities. The liquidator designated as
hereunder provided shall, by the Solicitor General, file a petition in the regional trial court
reciting the proceedings which have been taken and praying the assistance of the court in the
liquidation of such institutions. The court shall have jurisdiction in the same proceedings to assist
in the adjudication of the disputed claims against the bank or non-bank financial intermediary
performing quasi-banking functions and in the enforcement of individual liabilities of the
stockholders and do all that is necessary to preserve the assets of such institutions and to
implement the liquidation plan approved by the Monetary Board. The Monetary Board shall
designate an official of the Central bank or a person of recognized competence in banking or
finance, as liquidator who shall take over and continue the functions of the receiver previously
appointed by the Monetary Board under this Section. The liquidator shall, with all convenient
speed, convert the assets of the banking institutions or non-bank financial intermediary
performing quasi-banking function to money or sell, assign or otherwise dispose of the same to
creditors and other parties for the purpose of paying the debts of such institution and he may,
in the name of the bank or non-bank financial intermediary performing quasi-banking functions
and with the assistance of counsel as he may retain, institute such actions as may be necessary
in the appropriate court to collect and recover accounts and assets of such institution or defend
any action filed against the institution: Provided, However, That after having reasonably
established all claims against the institution, the liquidator may, with the approval of the court,
effect partial payments of such claims for assets of the institution in accordance with their legal
priority.
The assets of an institution under receivership or liquidation shall be deemed in custodia legis
in the hands of the receiver or liquidator and shall from the moment of such receivership or
liquidation, be exempt from any order of garnishment, levy, attachment, orexecution.
The provisions of any law to the contrary notwithstanding, the actions of the Monetary Board
under this Section, Section 28-A, an the second paragraph of Section 34 of this Act shall be final
an executory, and can be set aside by a court only if there is convince proof, after hearing, that
the action is plainly arbitrary and made in bad faith: Provided, That the same is raised in an
appropriate pleading filed by the stockholders of record representing the majority of th capital
stock within ten (10) days from the date the receiver take charge of the assets and liabilities of
the bank or non-bank financial intermediary performing quasi-banking functions or, in case of
conservatorship or liquidation, within ten (10) days from receipt of notice by the said majority
stockholders of said bank or non-bank financial intermediary of the order of its placement under
conservatorship o liquidation. No restraining order or injunction shall be issued by an court
enjoining the Central Bank from implementing its actions under this Section and the second
paragraph of Section 34 of this Act in th absence of any convincing proof that the action of the
Monetary Board is plainly arbitrary and made in bad faith and the petitioner or plaintiff files a
bond, executed in favor of the Central Bank, in an amount be fixed by the court. The restraining
order or injunction shall be refused or, if granted, shall be dissolved upon filing by the Central
Bank of a bond, which shall be in the form of cash or Central Bank cashier's check, in an amount
twice the amount of the bond of th petitioner or plaintiff conditioned that it will pay the
damages which the petitioner or plaintiff may suffer by the refusal or the dissolution of the
injunction. The provisions of Rule 58 of the New Rules of Court insofar as they are applicable
and not inconsistent with the provision of this Section shall govern the issuance and dissolution
of the re straining order or injunction contemplated in this Section.
xxx xxx xxx
Based on the aforequoted provision, the Monetary Board may order the cessation of operations
of a bank in the Philippine and place it under receivership upon a finding of insolvency or when
its continuance in business would involve probable loss its depositors or creditors. If the
Monetary Board shall determine and confirm within sixty (60) days that the bank is insolvent or
can no longer resume business with safety to its depositors, creditors and the general public, it
shall, if public interest will be served, order its liquidation.
Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and 78894 is whether
or not the Central Bank and the Monetary Board acted arbitrarily and in bad faith in finding and
thereafter concluding that petitioner bank is insolvent, and in ordering its closure on January
25, 1985.
As We have stated in Our resolution dated August 3, 1989, the documents pertinent to the
resolution of these petitions are the Teodoro Report, Tiaoqui Report, and the Valenzuela,
Aurellano and Tiaoqui Report and the supporting documents made as bases by the supporters
of their conclusions contained in their respective reports. We will focus Our study and discussion
however on the Tiaoqui Report and the Valenzuela, Aurellano and Tiaoqui Report. The former
recommended the closure and receivership of petitioner bank while the latter report made the
recommendation to eventually place the petitioner bank under liquidation. This Court shall
likewise take into consideration the findings contained in the reports of the two commissioners
who were appointed by this Court to hold the referral hearings, namely the report by Judge
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Manuel Cosico submitted February 20, 1988 and the report submitted by Justice Consuelo
Santiago on January 28, 1991.
There is no question that under Section 29 of the Central Bank Act, the following are the
mandatory requirements to be complied with before a bank found to be insolvent is ordered
closed and forbidden to do business in the Philippines: Firstly, an examination shall be
conducted by the head of the appropriate supervising or examining department or his
examiners or agents into the condition of the bank; secondly, it shall be disclosed in the
examination that the condition of the bank is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or creditors; thirdly, the department head
concerned shall inform the Monetary Board in writing, of the facts; and lastly, the Monetary
Board shall find the statements of the department head to be true.
Anent the first requirement, the Tiaoqui report, submitted on January 23, 1985, revealed that
the finding of insolvency of petitioner was based on the partial list of exceptions and findings on
the regular examination of the bank as of July 31, 1984 conducted by the Supervision and
Examination Sector II of the Central Bank of the PhilippinesCentral Bank (p. 1, Tiaoqui Report).
On December 17, 1984, this list of exceptions and finding was submitted to the petitioner bank
(p. 6, Tiaoqui Report) This was attached to the letter dated December 17, 1984, of examiner-in-
charge Dionisio Domingo of SES Department II of the Central Bank to Teodoro Arcenas, president
of petitione bank, which disclosed that the examination of the petitioner bank as to its financial
condition as of July 31, 1984 was not yet completed or finished on December 17, 1984 when the
Central Bank submitted the partial list of findings of examination to th petitioner bank. The letter
reads:
In connection with the regular examination of your institution a of July 31, 1984, we are
submitting herewith a partial list of our exceptions/findings for your comments.
Please be informed that we have not yet officially terminated our examination (tentatively
scheduled last December 7, 1984) and that we are still awaiting for the unsubmitted replies to
our previous letters requests. Moreover, other findings/ observations are still being summarized
including the classification of loans and other risk assets. These shall be submitted to you in due
time (p. 810, Rollo, Vol. III; emphasis ours).
It is worthy to note that a conference was held on January 21, 1985 at the Central Bank between
the officials of the latter an of petitioner bank. What transpired and what was agreed upon
during the conference was explained in the Tiaoqui report.
... The discussion centered on the substantial exposure of the bank to the various entities which
would have a relationship with the bank; the manner by which some bank funds were made
indirectly available to several entities within the group; and the unhealth financial status of
these firms in which the bank was additionally exposed through new funds or refinancing
accommodation including accrued interest.
Queried in the impact of these clean loans, on the bank solvency Mr. Dizon (BF Executive Vice
President) intimated that, collectively these corporations have large undeveloped real estate
properties in the suburbs which can be made answerable for the unsecured loans a well as the
Central Bank's credit accommodations. A formal reply of the bank would still be forthcoming.
(pp. 58-59, Rollo, Vol. I; emphasis ours)
Clearly, Tiaoqui based his report on an incomplete examination of petitioner bank and outrightly
concluded therein that the latter's financial status was one of insolvency or illiquidity. He arrived
at the said conclusion from the following facts: that as of July 31, 1984, total capital accounts
consisting of paid-in capital and other capital accounts such as surplus, surplus reserves and
undivided profits aggregated P351.8 million; that capital adjustments, however, wiped out the
capital accounts and placed the bank with a capital deficiency amounting to P334.956 million;
that the biggest adjustment which contributed to the deficit is the provision for estimated losses
on accounts classified as doubtful and loss which was computed at P600.4 million pursuant to
the examination. This provision is also known as valuation reserves which was set up or
deducted against the capital accounts of the bank in arriving at the latter's financial condition.
Tiaoqui however admits the insufficiency and unreliability of the findings of the examiner as to
the setting up of recommended valuation reserves from the assets of petitioner bank. He stated:
The recommended valuation reserves as bases for determining the financial status of the bank
would need to be discussed with the bank, consistent with standard examination procedure, for
which the bank would in turn reply. Also, the examination has not been officially terminated. (p.
7. Tiaoqui report; p. 59, Rollo, Vol. I)
In his testimony in the second referral hearing before Justice Santiago, Tiaoqui testified that on
January 21, 1985, he met with officers of petitioner bank to discuss the advanced findings and
exceptions made by Mr. Dionisio Domingo which covered 70%-80% of the bank's loan portfolio;
that at that meeting, Fortunato Dizon (BF's Executive Vice President) said that as regards the
unsecured loans granted to various corporations, said corporations had large undeveloped real
estate properties which could be answerable for the said unsecured loans and that a reply from
BF was forthcoming, that he (Tiaoqui) however prepared his report despite the absence of such
reply; that he believed, as in fact it is stated in his report, that despite the meeting on January
21, 1985, there was still a need to discuss the recommended valuation reserves of petitioner
285
bank and; that he however, did not wait anymore for a discussion of the recommended
valuation reserves and instead prepared his report two days after January 21, 1985 (pp. 3313-
3314, Rollo).
Records further show that the examination of petitioner bank was officially terminated only
when Central Bank Examination-charge Dionisio Domingo submitted his final report of
examination on March 4,1985.
It is evident from the foregoing circumstances that the examination contemplated in Sec. 29 of
the CB Act as a mandatory requirement was not completely and fully complied with. Despite the
existence of the partial list of findings in the examination of the bank, there were still highly
significant items to be weighed and determined such as the matter of valuation reserves, before
these can be considered in the financial condition of the bank. It would be a drastic move to
conclude prematurely that a bank is insolvent if the basis for such conclusion is lacking and
insufficient, especially if doubt exists as to whether such bases or findings faithfully represent
the real financial status of the bank.
The actuation of the Monetary Board in closing petitioner bank on January 25, 1985 barely four
days after a conference with the latter on the examiners' partial findings on its financial position
is also violative of what was provided in the CB Manual of Examination Procedures. Said manual
provides that only after the examination is concluded, should a pre-closing conference led by
the examiner-in-charge be held with the officers/representatives of the institution on the
findings/exception, and a copy of the summary of the findings/violations should be furnished
the institution examined so that corrective action may be taken by them as soon as possible
(Manual of Examination Procedures, General Instruction, p. 14). It is hard to understand how a
period of four days after the conference could be a reasonable opportunity for a bank to
undertake a responsive and corrective action on the partial list of findings of the examiner-in-
charge.
We recognize the fact that it is the responsibility of the Central Bank of the Philippines to
administer the monetary, banking and credit system of the country and that its powers and
functions shall be exercised by the Monetary Board pursuant to Rep. Act No. 265, known as the
Central Bank Act. Consequently, the power and authority of the Monetary Board to close banks
and liquidate them thereafter when public interest so requires is an exercise of the police power
of the state. Police power, however, may not be done arbitratrily or unreasonably and could be
set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust or is tantamount to
a denial of due process and equal protection clauses of the Constitution (Central Bank v. Court
of Appeals, Nos. L-50031-32, July 27, 1981, 106 SCRA 143).
In the instant case, the basic standards of substantial due process were not observed. Time and
again, We have held in several cases, that the procedure of administrative tribunals must satisfy
the fundamentals of fair play and that their judgment should express a well-supported
conclusion.
In the celebrated case of Ang Tibay v. Court of Industrial Relations, 69 Phil. 635, this Court laid
down several cardinal primary rights which must be respected in a proceeding before an
administrative body.
However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does not require a
previous hearing before the Monetary Board implements the closure of a bank, since its action
is subject to judicial scrutiny as provided for under the same law (Rural Bank of Bato v. IAC, G.R.
No. 65642, October 15, 1984, Rural Bank v. Court of Appeals, G.R. 61689, June 20, 1988,162
SCRA 288).
Notwithstanding the foregoing, administrative due process does not mean that the other
important principles may be dispensed with, namely: the decision of the administrative body
must have something to support itself and the evidence must be substantial. Substantial
evidence is more than a mere scintilla. It means such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion (Ang Tibay vs. CIR, supra). Hence, where the
decision is merely based upon pieces of documentary evidence that are not sufficiently
substantial and probative for the purpose and conclusion they are presented, the standard of
fairness mandated in the due process clause is not met. In the case at bar, the conclusion arrived
at by the respondent Board that the petitioner bank is in an illiquid financial position on January
23, 1985, as to justify its closure on January 25, 1985 cannot be given weight and finality as the
report itself admits the inadequacy of its basis to support its conclusion.
The second requirement provided in Section 29, R.A. 265 before a bank may be closed is that
the examination should disclose that the condition of the bank is one of insolvency.
As to the concept of whether the bank is solvent or not, the respondents contend that under
the Central Bank Manual of Examination Procedures, Central Bank examiners must recommend
valuation reserves, when warranted, to be set up or deducted against the corresponding asset
account to determine the bank's true condition or net worth. In the case of loan accounts, to
which practically all the questioned valuation reserves refer, the manual provides that:
1. For doubtful loans, or loans the ultimate collection of which is doubtful and in which a
substantial loss is probable but not yet definitely ascertainable as to extent, valuation reserves
of fifty per cent (50%) of the accounts should be recommended to be set up.
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2. For loans classified as loss, or loans regarded by the examiner as absolutely uncollectible
or worthless, valuation reserves of one hundred percent (100%) of the accounts should be
recommended to be set up (p. 8, Objections to Santiago report).
The foregoing criteria used by respondents in determining the financial condition of the bank is
based on Section 5 of RA 337, known as the General Banking Act which states:
Sec. 5. The following terms shall be held to be synonymous and interchangeable:
... f. Unimpaired Capital and Surplus, "Combined capital accounts," and "Net worth," which
terms shall mean for the purposes of this Act, the total of the "unimpaired paid-in capital,
surplus, and undivided profits net of such valuation reserves as may be required by the Central
Bank."
There is no doubt that the Central Bank Act vests authority upon the Central Bank and Monetary
Board to take charge and administer the monetary and banking system of the country and this
authority includes the power to examine and determine the financial condition of banks for
purposes provided for by law, such as for the purpose of closure on the ground of insolvency
stated in Section 29 of the Central Bank Act. But express grants of power to public officers should
be subjected to a strict interpretation, and will be construed as conferring those powers which
are expressly imposed or necessarily implied (Floyd Mechem, Treatise on the Law of Public
Offices and Officers, p. 335).
In this case, there can be no clearer explanation of the concept of insolvency than what the law
itself states. Sec. 29 of the Central Bank Act provides that insolvency under the Act, shall be
understood to mean that "the realizable assets of a bank or a non-bank financial intermediary
performing quasi-banking functions as determined by the Central Bank are insufficient to meet
its liabilities."
Hence, the contention of the Central Bank that a bank's true financial condition is synonymous
with the terms "unimpaired capital and surplus," "combined capital accounts" and net worth
after deducting valuation reserves from the capital, surplus and unretained earnings, citing Sec.
5 of RA 337 is misplaced.
Firstly, it is clear from the law that a solvent bank is one in which its assets exceed its liabilities.
It is a basic accounting principle that assets are composed of liabilities and capital. The term
"assets" includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302). On the
other hand, the term "capital" includes common and preferred stock, surplus reserves, surplus
and undivided profits. (Manual of Examination Procedures, Report of Examination on
Department of Commercial and Savings Banks, p. 3-C). If valuation reserves would be deducted
from these items, the result would merely be the networth or the unimpaired capital and surplus
of the bank applying Sec. 5 of RA 337 but not the total financial condition of the bank.
Secondly, the statement of assets and liabilities is used in balance sheets. Banks use statements
of condition to reflect the amounts, nature and changes in the assets and liabilities. The Central
Bank Manual of Examination Procedures provides a format or checklist of a statement of
condition to be used by examiners as guide in the examination of banks. The format enumerates
the items which will compose the assets and liabilities of a bank. Assets include cash and those
due from banks, loans, discounts and advances, fixed assets and other property owned or
acquired and other miscellaneous assets. The amount of loans, discounts and advances to be
stated in the statement of condition as provided for in the manual is computed after deducting
valuation reserves when deemed necessary. On the other hand, liabilities are composed of
demand deposits, time and savings deposits, cashier's, manager's and certified checks,
borrowings, due to head office, branches; and agencies, other liabilities and deferred credits
(Manual of Examination Procedure, p. 9). The amounts stated in the balance sheets or
statements of condition including the computation of valuation reserves when justified, are
based however, on the assumption that the bank or company will continue in business
indefinitely, and therefore, the networth shown in the statement is in no sense an indication of
the amount that might be realized if the bank or company were to be liquidated immediately
(Prentice Hall Encyclopedic Dictionary of Business Finance, p. 48). Further, based on
respondents' submissions, the allowance for probable losses on loans and discounts represents
the amount set up against current operations to provide for possible losses arising from non-
collection of loans and advances, and this account is also referred to as valuation reserve (p. 9,
Objections to Santiago report). Clearly, the statement of condition which contains a provision
for recommended valuation reserves should not be used as the ultimate basis to determine the
solvency of an institution for the purpose of termination of its operations.
Respondents acknowledge that under the said CB manual, CB examiners must recommend
valuation reserves, when warranted, to be set up against the corresponding asset account (p. 8,
Objections to Santiago report). Tiaoqui himself, as author of the report recommending the
closure of petitioner bank admits that the valuation reserves should still be discussed with the
petitioner bank in compliance with standard examination procedure. Hence, for the Monetary
Board to unilaterally deduct an uncertain amount as valuation reserves from the assets of a bank
and to conclude therefrom without sufficient basis that the bank is insolvent, would be totally
unjust and unfair.
The test of insolvency laid down in Section 29 of the Central Bank Act is measured by
determining whether the realizable assets of a bank are leas than its liabilities. Hence, a bank is
solvent if the fair cash value of all its assets, realizable within a reasonable time by a reasonable
prudent person, would equal or exceed its total liabilities exclusive of stock liability; but if such
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fair cash value so realizable is not sufficient to pay such liabilities within a reasonable time, the
bank is insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated in other words, the
insolvency of a bank occurs when the actual cash market value of its assets is insufficient to pay
its liabilities, not considering capital stock and surplus which are not liabilities for such purpose
(Exley v. Harris, 267 p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n
115,117).
In arriving at the computation of realizable assets of petitioner bank, respondents used its books
which undoubtedly are not reflective of the actual cash or fair market value of its assets. This is
not the proper procedure contemplated in Sec. 29 of the Central Bank Act. Even the CB Manual
of Examination Procedures does not confine examination of a bank solely with the
determination of the books of the bank. The latter is part of auditing which should not be
confused with examination. Examination appraises the soundness of the institution's assets, the
quality and character of management and determines the institution's compliance with laws,
rules and regulations. Audit is a detailed inspection of the institution's books, accounts,
vouchers, ledgers, etc. to determine the recording of all assets and liabilities. Hence,
examination concerns itself with review and appraisal, while audit concerns itself with
verification (CB Manual of Examination Procedures, General Instructions, p. 5). This Court
however, is not in the position to determine how much cash or market value shall be assigned
to each of the assets and liabilities of the bank to determine their total realizable value. The
proper determination of these matters by using the actual cash value criteria belongs to the field
of fact-finding expertise of the Central Bank and the Monetary Board. Notwithstanding the fact
that the figures arrived at by the respondent Board as to assets and liabilities do not truly
indicate their realizable value as they were merely based on book value, We will however, take
a look at the figures presented by the Tiaoqui Report in concluding insolvency as of July 31, 1984
and at the figures presented by the CB authorized deputy receiver and by the Valenzuela,
Aurellano and Tiaoqui Report which recommended the liquidation of the bank by reason of
insolvency as o January 25,1985.
The Tiaoqui report dated January 23, 1985, which was based on partial examination findings on
the bank's condition as of July 31, 1984, states that total liabilities of P5,282.1 million exceeds
total assets of P4,947.2 million after deducting from the assets valuation reserves of P612.2
million. Since, as We have explained in our previous discussion that valuation reserves can not
be legally deducted as there was no truthful and complete evaluation thereof as admitted by
the Tiaoqui report itself, then an adjustment of the figures win show that the liabilities of
P5,282.1 million will not exceed the total assets which will amount to P5,559.4 if the 612.2
million allotted to valuation reserves will not be deducted from the assets. There can be no basis
therefore for both the conclusion of insolvency and for the decision of the respondent Board to
close petitioner bank and place it under receivership.
Concerning the financial position of the bank as of January 25, 1985, the date of the closure of
the bank, the consolidated statement of condition thereof as of the aforesaid date shown in the
Valenzuela, Aurellano and Tiaoqui report on the receivership of petitioner bank, dated March
19, 1985, indicates that total liabilities of 4,540.84 million does not exceed the total assets of
4,981.53 million. Likewise, the consolidated statement of condition of petitioner bank as of
January 25, 1985 prepared by the Central Bank Authorized Deputy Receiver Artemio Cruz shows
that total assets amounting to P4,981,522,996.22 even exceeds total liabilities amounting to
P4,540,836,834.15. Based on the foregoing, there was no valid reason for the Valenzuela,
Aurellano and Tiaoqui report to finally recommend the liquidation of petitioner bank instead of
its rehabilitation.
We take note of the exhaustive study and findings of the Cosico report on the petitioner bank's
having engaged in unsafe, unsound and fraudulent banking practices by the granting of huge
unsecured loans to several subsidiaries and related companies. We do not see, however, that
this has any material bearing on the validity of the closure. Section 34 of the RA 265, Central
Bank Act empowers the Monetary Board to take action under Section 29 of the Central Bank Act
when a bank "persists in carrying on its business in an unlawful or unsafe manner." There was
no showing whatsoever that the bank had persisted in committing unlawful banking practices
and that the respondent Board had attempted to take effective action on the bank's alleged
activities. During the period from July 27, 1984 up to January 25, 1985, when petitioner bank
was under conservatorship no official of the bank was ever prosecuted, suspended or removed
for any participation in unsafe and unsound banking practices, and neither was the entire
management of the bank replaced or substituted. In fact, in her testimony during the second
referral hearing, Carlota Valenzuela, CB Deputy Governor, testified that the reason for petitioner
bank's closure was not unsound, unsafe and fraudulent banking practices but the alleged
insolvency position of the bank (TSN, August 3, 1990, p. 3316, Rollo, Vol. VIII).
Finally, another circumstance which point to the solvency of petitioner bank is the granting by
the Monetary Board in favor of the former a credit line in the amount of P3 billion along with
the placing of petitioner bank under conservatorship by virtue of M.B. Resolution No. 955 dated
July 27, 1984. This paved the way for the reopening of the bank on August 1, 1984 after a self-
imposed bank holiday on July 23, 1984.
On emergency loans and advances, Section 90 of RA 265 provides two types of emergency loans
that can be granted by the Central Bank to a financially distressed bank:
Sec. 90. ... In periods of emergency or of imminent financial panic which directly threaten
monetary and banking stability, the Central Bank may grant banking institutions extraordinary
advances secured by any assets which are defined as acceptable by by a concurrent vote of at
least five members of the Monetary Board. While such advances are outstanding, the debtor
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institution may not expand the total volume of its loans or investments without the prior
authorization of the Monetary Board.
The Central Bank may, at its discretion, likewise grant advances to banking institutions, even
during normal periods, for the purpose of assisting a bank in a precarious financial condition or
under serious financial pressures brought about by unforeseen events, or events which, though
foreseeable, could not be prevented by the bank concerned. Provided, however, That the
Monetary Board has ascertained that the bank is not insolvent and has clearly realizable assets
to secure the advances. Provided, further, That a concurrent vote of at least five members of
the Monetary Board is obtained. (Emphasis ours)
The first paragraph of the aforequoted provision contemplates a situation where the whole
banking community is confronted with financial and economic crisis giving rise to serious and
widespread confusion among the public, which may eventually threaten and gravely prejudice
the stability of the banking system. Here, the emergency or financial confusion involves the
whole banking community and not one bank or institution only. The second situation on the
other hand, provides for a situation where the Central Bank grants a loan to a bank with
uncertain financial condition but not insolvent.
As alleged by the respondents, the following are the reasons of the Central Bank in approving
the resolution granting the P3 billion loan to petitioner bank and the latter's reopening after a
brief self-imposed banking holiday:
WHEREAS, the closure by Banco Filipino Savings and Mortgage Bank of its Banking offices on its
own initiative has worked serious hardships on its depositors and has affected confidence levels
in the banking system resulting in a feeling of apprehension among depositors and unnecessary
deposit withdrawals;
WHEREAS, the Central Bank is charged with the function of administering the banking system;
WHEREAS, the reopening of Banco Filipino would require additional credit resources from the
Central Bank as well as an independent management acceptable to the Central Bank;
WHEREAS, it is the desire of the Central Bank to rapidly diffuse the uncertainty that presently
exists;
... (M.B. Min. No. 35 dated July 27, 1984 cited in Respondents' Objections to Santiago Report, p.
26; p. 3387, Rollo, Vol. IX; Emphasis ours).
A perusal of the foregoing "Whereas" clauses unmistakably show that the clear reason for the
decision to grant the emergency loan to petitioner bank was that the latter was suffering from
financial distress and severe bank "run" as a result of which it closed on July 23, 1984 and that
the release of the said amount is in accordance with the Central Bank's full support to meet
Banco Filipino's depositors' withdrawal requirements (Excerpts of minutes of meeting on MB
Min. No. 35, p. 25, Rollo, Vol. IX). Nothing therein shows that an extraordinary emergency
situation exists affecting most banks, not only as regards petitioner bank. This Court thereby
finds that the grant of the said emergency loan was intended from the beginning to fall under
the second paragraph of Section 90 of the Central Bank Act, which could not have occurred if
the petitioner bank was not solvent. Where notwithstanding knowledge of the irregularities and
unsafe banking practices allegedly committed by the petitioner bank, the Central Bank even
granted financial support to the latter and placed it under conservatorship, such actuation
means that petitioner bank could still be saved from its financial distress by adequate aid and
management reform, which was required by Central Bank's duty to maintain the stability of the
banking system and the preservation of public confidence in it (Ramos v. Central Bank, No. L-
29352, October 4, 1971, 41 SCRA 565).
In view of the foregoing premises, We believe that the closure of the petitioner bank was
arbitrary and committed with grave abuse of discretion. Granting in gratia argumenti that the
closure was based on justified grounds to protect the public, the fact that petitioner bank was
suffering from serious financial problems should not automatically lead to its liquidation. Section
29 of the Central Bank provides that a closed bank may be reorganized or otherwise placed in
such a condition that it may be permitted to resume business with safety to its depositors,
creditors and the general public.
We are aware of the Central Bank's concern for the safety of Banco Filipino's depositors as well
as its creditors including itself which had granted substantial financial assistance up to the time
of the latter's closure. But there are alternatives to permanent closure and liquidation to
safeguard those interests as well as those of the general public for the failure of Banco Filipino
or any bank for that matter may be viewed as an irreversible decline of the country's entire
banking system and ultimately, it may reflect on the Central Bank's own viability. For one thing,
the Central Bank and the Monetary Board should exercise strict supervision over Banco Filipino.
They should take all the necessary steps not violative of the laws that will fully secure the
repayment of the total financial assistance that the Central Bank had already granted or would
grant in the future.
ACCORDINGLY, decision is hereby rendered as follows:
1. The motion for reconsideration in G.R. Nos. 68878 and 81303, and the petitions in G.R.
Nos. 77255-58, 78766, 81304 and 90473 are DENIED;
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 G.R. No. 112830 February 1, 1996
2. The petitions in G.R. No. 70054, 78767 and 78894 are GRANTED and the assailed order
of the Central Bank and the Monetary Board dated January 25, 1985 is hereby ANNULLED AND JERRY ONG, petitioner,
SET ASIDE. The Central Bank and the Monetary Board are ordered to reorganize petitioner Banco vs.
Filipino Savings and Mortgage Bank and allow the latter to resume business in the Philippines COURT OF APPEALS and RURAL BANK OF OLONGAPO, INC., represented by its Liquidator,
under the comptrollership of both the Central Bank and the Monetary Board and under such GUILLERMO G. REYES, JR. and Deputy Liquidator ABEL ALLANIGUE, respondents.
conditions as may be prescribed by the latter in connection with its reorganization until such
time that petitioner bank can continue in business with safety to its creditors, depositors and DECISION
the general public.
BELLOSILLO, J.:
SO ORDERED.
The jurisdiction of a regular court over a bank undergoing liquidation is the issue in this petition
for review of the decision of the Court of Appeals.1

On 5 February 1991 Jerry Ong filed with the Regional Trial Court of Quezon City a petition for
the surrender of TCT Nos. 13769 and 13770 pursuant to the provisions of Secs. 63(b) and 107 of
P.D. 15292 against Rural Bank of Olongapo, Inc. (RBO), represented by its liquidator Guillermo
G. Reyes, Jr. and deputy liquidator Abel Allanigue.3 The petition averred inter alia that

2. The RBO was the owner in fee simple of two parcels of land including the improvements
thereon situated in Tagaytay City . . . particularly described in TCT Nos. 13769 and 13770 . . . .

3. Said parcels of land were duly mortgaged by RBO in favor of petitioner on December 29,
1983 to guarantee the payment of Omnibus Finance, Inc., which is likewise now undergoing
liquidation proceedings of its money market obligations to petitioner in the principal amount of
P863,517.02 . . . .

4. Omnibus Finance, Inc., not having seasonably settled its obligations to petitioner, the
latter proceeded to effect the extrajudicial foreclosure of said mortgages, such that on March
23, 1984, the City Sheriff of Tagaytay City issued a Certificate of Sale in favor of petitioner . . . .

5. Said Certificate of Sale . . . was duly registered with the Registry of Deeds of Tagaytay
City on July 16, 1985, as shown in the certified true copies of the aforementioned titles . . . .

6. Respondents failed to seasonably redeem said parcels of land, for which reason,
petitioner has executed an Affidavit of Consolidation of Ownership which, to date, has not been
submitted to the Registry of Deeds of Tagaytay City, in view of the fact that possession of the
aforesaid titles or owner's duplicate certificates of title remains with the RBO.

290
7. To date, petitioner has not been able to effect the registration of said parcels of land in
his name in view of the persistent refusal of respondents, despite demand, to surrender RBO's
copies of its owner's certificates of title for the parcels of land covered by TCT Nos. 13769 and
13770.4
Respondent RBO filed a motion to dismiss on the ground of res judicata alleging that petitioner
had earlier sought a similar relief from Br. 18 of the Regional Trial Court of Tagaytay City, which
case was dismissed with finality on appeal before the Court of Appeals.
In a supplemental motion to dismiss, respondent RBO contended that it was undergoing
liquidation and, pursuant to prevailing jurisprudence, it is the liquidation court which has
exclusive jurisdiction to take cognizance of petitioner's claim.
On 7 May 1991 the trial court denied the motion to dismiss because it found that the causes of
action in the previous and present cases were different although it was silent on the
jurisdictional issue. Accordingly, respondent RBO filed a motion for reconsideration but the
same was similarly rejected in the order of June 11 1991 holding that: (a) subject parcels of land
were sold to petitioner through public bidding on 23 March 1984 and, consequently, said pieces
of realty were no longer part of the assets of respondent RBO; and, (b) in the same token, subject
lots were no longer considered assets of respondent RBO when its liquidation was commenced
by the Central Bank on 9 November 1984 and when the petition for assistance in its liquidation
was approved by the Regional Trial Court of Olongapo City on 30 May 1985.
On 5 July 1991 respondent RBO filed a manifestation and urgent motion for reconsideration
arguing that the validity of the certificate of sale issued to petitioner was still at issue in another
case between them and therefore the properties covered by said certificate were still part and
parcel of its assets.
Still unpersuaded by respondent RBO's arguments, the trial court denied reconsideration in its
order of 18 September 1991 prompting the bank to elevate the case to respondent Court of
Appeals by way of a petition for certiorari and prohibition. On 12 February 1992 respondent
court rendered a decision annulling the challenged order of the court a quo dated 19 June 1991
which sustained the jurisdiction of the trial court as well as the order of 18 September 1991
denying reconsideration thereof. Moreover, the trial judge was ordered to dismiss Civil Case No.
Q-91-8019 without prejudice to the right of petitioner to file his claim in the liquidation
proceedings (Sp. Proc. No. 170-0-85) pending before Br. 73 of the Regional Trial Court of
Olongapo City.5
In reversing the trial court the appellate court noted that Sec. 29, par. 3, of R.A. 265 as amended
by P.D. 18276 does not limit the jurisdiction of the liquidation court to claims against the assets
of the insolvent bank. The provision is general in that it clearly and unqualifiedly states that the
liquidation court shall have jurisdiction to adjudicate disputed claims against the bank.
"Disputed claims" refer to all claims, whether they be against the assets of the insolvent bank,
for specific performance, breach of contract, damages, or whatever. To limit the jurisdiction of
the liquidation court to those claims against the asset's of the bank is to remove significantly
and without basis the cases that may be brought against a bank in case of insolvency.
Respondent court also noted that the certificates of title are still in the name of respondent RBO.
As far as third persons are concerned (and these include claimants in the liquidation court),
registration is the operative act which would convey title to the property.
Petitioner submits that Civil Case No. Q-91-8019 may proceed independently of Sp. Proc. No.
170-0-85. He argues that the disputed parcels of land have been extrajudicially foreclosed and
the corresponding certificate of sale issued in his favor; that considering that respondent RBO
failed to redeem said properties he should now be allowed to consolidate his title thereto; that
respondent RBO's mortgage of TCT Nos. 13769 and 13770 in favor of petitioner and its
subsequent foreclosure are presumed valid and regular; and, that the liquidation court has no
jurisdiction over subject parcels of land since they are no longer assets of respondent RBO.
We find no merit in the petition. Section 29, par. 3, of R.A. 265 as amended by P. D. 1827
provides
If the Monetary Board shall determine and confirm within (sixty days) that the bank . . . is
insolvent or cannot resume business with safety to its depositors, creditors and the general
public, it shall, if the public interest requires, order its liquidation, indicate the manner of its
liquidation and approve a liquidation plan. The Central Bank shall, by the Solicitor General, file
a petition in the Court of First Instance 7 reciting the proceedings which have been taken and
praying the assistance of the court in the liquidation of such institution. The court shall have
jurisdiction in the same proceedings to adjudicate disputed claims against the bank . . . . and
enforce individual liabilities of the stockholders and do all that is necessary to preserve the
assets of such institution and to implement the liquidation plan approved by the Monetary
Board (emphasis supplied).
Applying the aforequoted provision in Hernandez v. Rural Bank of Lucena, Inc., 8 this Court ruled
The fact that the insolvent bank is forbidden to do business, that its assets are turned over to
the Superintendent of Banks, as a receiver, for conversion into cash, and that its liquidation is
undertaken with judicial intervention means that, as far as lawful and practicable, all claims
against the insolvent bank should be filed in the liquidation proceeding (emphasis supplied).
291
We explained therein the rationale behind the provision, i.e., the judicial liquidation is intended
to prevent multiplicity of actions against the insolvent bank. It is a pragmatic arrangement
designed to establish due process and orderliness in the liquidation of the bank, to obviate the
proliferation of litigations and to avoid injustice and arbitrariness. The lawmaking body
contemplated that for convenience only one court, if possible, should pass upon the claims
against the insolvent bank and that the liquidation court should assist the Superintendent of
Banks and regulate his operations.

The phrase "(T)he court shall have jurisdiction in the same proceedings to adjudicate disputed
claims against the bank" appears to have misled petitioner. He argues that to the best of his
personal knowledge there is no pending action filed before any court or agency which contests
his right over subject properties. Thus his petition before the Regional Trial Court of Quezon City
cannot be considered a "disputed claim" as contemplated by law.

It is not necessary that a claim be initially disputed in a court or agency before it is filed with the
liquidation court. As may be gleaned in the Hernandez case, the term "disputed claim" in the
provision simply connotes that

[i]n the course of the liquidation, contentious cases might arise wherein a full-dress hearing
would be required and legal issues would have to be resolved. Hence, it would be necessary in
justice to all concerned that a Court of First Instance (now Regional Trial Court) . . . assist and
supervise the liquidation and . . . . act as umpire or arbitrator in the allowance and disallowance
of claims.

Petitioner must have overlooked the fact that since respondent RBO is insolvent other claimants
not privy to their transaction may be involved. As far as those claimants are concerned, in the
absence of certificates of title in the name of petitioner, subject lots still form part of the assets
of the insolvent bank.

On the basis of the Hernandez case as well as Sec. 29, par. 3, of R.A. 265 as amended by P.D.
1827, respondent Court of Appeals was correct in holding that the Regional Trial Court of
Quezon City, Br. 79, did not have jurisdiction over the petition, much less in ordering the
dismissal of Civil Case No. Q-91-8019, without prejudice to petitioner's right to file his claim in
Sp. Proc. No. 170-0-85 before the Regional Trial Court of Olongapo City, Br. 73.

WHEREFORE, the petition is DENIED. The decision of respondent Court of Appeals dated 12
February 1992 is AFFIRMED. Costs against petitioner.

SO ORDERED.

292
 VI. Anti-Money
Laundering Act (R.A.
9160)
VII. Richelle Ann Zamora

293
 G.R. No. 170281 January 18, 2008
REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEY LAUNDERING COUNCIL,
petitioner,
vs.
GLASGOW CREDIT AND COLLECTION SERVICES, INC. and CITYSTATE SAVINGS BANK, INC.,
respondents.
DECISION
CORONA, J.:
This is a petition for review1 of the order2 dated October 27, 2005 of the Regional Trial Court
(RTC) of Manila, Branch 47, dismissing the complaint for forfeiture3 filed by the Republic of the
Philippines, represented by the Anti-Money Laundering Council (AMLC) against respondents
Glasgow Credit and Collection Services, Inc. (Glasgow) and Citystate Savings Bank, Inc. (CSBI).
On July 18, 2003, the Republic filed a complaint in the RTC Manila for civil forfeiture of assets
(with urgent plea for issuance of temporary restraining order [TRO] and/or writ of preliminary
injunction) against the bank deposits in account number CA-005-10-000121-5 maintained by
Glasgow in CSBI. The case, filed pursuant to RA 9160 (the Anti-Money Laundering Act of 2001),
as amended, was docketed as Civil Case No. 03-107319.
Acting on the Republics urgent plea for the issuance of a TRO, the executive judge4 of RTC
Manila issued a 72-hour TRO dated July 21, 2003. The case was thereafter raffled to Branch 47
and the hearing on the application for issuance of a writ of preliminary injunction was set on
August 4, 2003.
After hearing, the trial court (through then Presiding Judge Marivic T. Balisi-Umali) issued an
order granting the issuance of a writ of preliminary injunction. The injunctive writ was issued on
August 8, 2003.
Meanwhile, summons to Glasgow was returned "unserved" as it could no longer be found at its
last known address.
On October 8, 2003, the Republic filed a verified omnibus motion for (a) issuance of alias
summons and (b) leave of court to serve summons by publication. In an order dated October
15, 2003, the trial court directed the issuance of alias summons. However, no mention was made
of the motion for leave of court to serve summons by publication.
In an order dated January 30, 2004, the trial court archived the case allegedly for failure of the
Republic to serve the alias summons. The Republic filed an ex parte omnibus motion to (a)
reinstate the case and (b) resolve its pending motion for leave of court to serve summons by
publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and
directed the Republic to serve the alias summons on Glasgow and CSBI within 15 days. However,
it did not resolve the Republics motion for leave of court to serve summons by publication
declaring:
Until and unless a return is made on the alias summons, any action on [the Republics] motion
for leave of court to serve summons by publication would be untenable if not premature.
On July 12, 2004, the Republic (through the Office of the Solicitor General [OSG]) received a copy
of the sheriffs return dated June 30, 2004 stating that the alias summons was returned
"unserved" as Glasgow was no longer holding office at the given address since July 2002 and left
no forwarding address.
Meanwhile, the Republics motion for leave of court to serve summons by publication remained
unresolved. Thus, on August 11, 2005, the Republic filed a manifestation and ex parte motion
to resolve its motion for leave of court to serve summons by publication.
On August 12, 2005, the OSG received a copy of Glasgows "Motion to Dismiss (By Way of Special
Appearance)" dated August 11, 2005. It alleged that (1) the court had no jurisdiction over its
person as summons had not yet been served on it; (2) the complaint was premature and stated
no cause of action as there was still no conviction for estafa or other criminal violations
implicating Glasgow and (3) there was failure to prosecute on the part of the Republic.
The Republic opposed Glasgows motion to dismiss. It contended that its suit was an action quasi
in rem where jurisdiction over the person of the defendant was not a prerequisite to confer
jurisdiction on the court. It asserted that prior conviction for unlawful activity was not a
precondition to the filing of a civil forfeiture case and that its complaint alleged ultimate facts
sufficient to establish a cause of action. It denied that it failed to prosecute the case.
On October 27, 2005, the trial court issued the assailed order. It dismissed the case on the
following grounds: (1) improper venue as it should have been filed in the RTC of Pasig where
CSBI, the depository bank of the account sought to be forfeited, was located; (2) insufficiency of
the complaint in form and substance and (3) failure to prosecute. It lifted the writ of preliminary
injunction and directed CSBI to release to Glasgow or its authorized representative the funds in
CA-005-10-000121-5.
294
Raising questions of law, the Republic filed this petition.
On November 23, 2005, this Court issued a TRO restraining Glasgow and CSBI, their agents,
representatives and/or persons acting upon their orders from implementing the assailed
October 27, 2005 order. It restrained Glasgow from removing, dissipating or disposing of the
funds in account no. CA-005-10-000121-5 and CSBI from allowing any transaction on the said
account.
The petition essentially presents the following issue: whether the complaint for civil forfeiture
was correctly dismissed on grounds of improper venue, insufficiency in form and substance and
failure to prosecute.
The Court agrees with the Republic.
The Complaint Was Filed
In The Proper Venue
In its assailed order, the trial court cited the grounds raised by Glasgow in support of its motion
to dismiss:
1. That this [c]ourt has no jurisdiction over the person of Glasgow considering that no
[s]ummons has been served upon it, and it has not entered its appearance voluntarily;
2. That the [c]omplaint for forfeiture is premature because of the absence of a prior finding by
any tribunal that Glasgow was engaged in unlawful activity: [i]n connection therewith[,] Glasgow
argues that the [c]omplaint states no cause of action; and
3. That there is failure to prosecute, in that, up to now, summons has yet to be served upon
Glasgow.5
But inasmuch as Glasgow never questioned the venue of the Republics complaint for civil
forfeiture against it, how could the trial court have dismissed the complaint for improper venue?
In Dacoycoy v. Intermediate Appellate Court6 (reiterated in Rudolf Lietz Holdings, Inc. v. Registry
of Deeds of Paraaque City),7 this Court ruled:
The motu proprio dismissal of petitioners complaint by [the] trial court on the ground of
improper venue is plain error. (emphasis supplied)
At any rate, the trial court was a proper venue.
On November 15, 2005, this Court issued A.M. No. 05-11-04-SC, the Rule of Procedure in Cases
of Civil Forfeiture, Asset Preservation, and Freezing of Monetary Instrument, Property, or
Proceeds Representing, Involving, or Relating to an Unlawful Activity or Money Laundering
Offense under RA 9160, as amended (Rule of Procedure in Cases of Civil Forfeiture). The order
dismissing the Republics complaint for civil forfeiture of Glasgows account in CSBI has not yet
attained finality on account of the pendency of this appeal. Thus, the Rule of Procedure in Cases
of Civil Forfeiture applies to the Republics complaint.8 Moreover, Glasgow itself judicially
admitted that the Rule of Procedure in Cases of Civil Forfeiture is "applicable to the instant
case."9
Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the Rule of Procedure in Cases
of Civil Forfeiture provides:
Sec. 3. Venue of cases cognizable by the regional trial court. A petition for civil forfeiture shall
be filed in any regional trial court of the judicial region where the monetary instrument, property
or proceeds representing, involving, or relating to an unlawful activity or to a money laundering
offense are located; provided, however, that where all or any portion of the monetary
instrument, property or proceeds is located outside the Philippines, the petition may be filed in
the regional trial court in Manila or of the judicial region where any portion of the monetary
instrument, property, or proceeds is located, at the option of the petitioner. (emphasis supplied)
Under Section 3, Title II of the Rule of Procedure in Cases of Civil Forfeiture, therefore, the venue
of civil forfeiture cases is any RTC of the judicial region where the monetary instrument, property
or proceeds representing, involving, or relating to an unlawful activity or to a money laundering
offense are located. Pasig City, where the account sought to be forfeited in this case is situated,
is within the National Capital Judicial Region (NCJR). Clearly, the complaint for civil forfeiture of
the account may be filed in any RTC of the NCJR. Since the RTC Manila is one of the RTCs of the
NCJR,10 it was a proper venue of the Republics complaint for civil forfeiture of Glasgows
account.
The Complaint Was Sufficient In Form And Substance
In the assailed order, the trial court evaluated the Republics complaint to determine its
sufficiency in form and substance:
At the outset, this [c]ourt, before it proceeds, takes the opportunity to examine the [c]omplaint
and determine whether it is sufficient in form and substance.
295
Before this [c]ourt is a [c]omplaint for Civil Forfeiture of Assets filed by the [AMLC], represented
by the Office of the Solicitor General[,] against Glasgow and [CSBI] as necessary party. The
[c]omplaint principally alleges the following:
(a) Glasgow is a corporation existing under the laws of the Philippines, with principal office
address at Unit 703, 7th Floor, Citystate Center [Building], No. 709 Shaw Boulevard[,] Pasig City;
(b) [CSBI] is a corporation existing under the laws of the Philippines, with principal office at
Citystate Center Building, No. 709 Shaw Boulevard, Pasig City;
(c) Glasgow has funds in the amount of P21,301,430.28 deposited with [CSBI], under CA 005-10-
000121-5;
(d) As events have proved, aforestated bank account is related to the unlawful activities of Estafa
and violation of Securities Regulation Code;
(e) The deposit has been subject of Suspicious Transaction Reports;
(f) After appropriate investigation, the AMLC issued Resolutions No. 094 (dated July 10, 2002),
096 (dated July 12, 2002), 101 (dated July 23, 2002), and 108 (dated August 2, 2002), directing
the issuance of freeze orders against the bank accounts of Glasgow;
(g) Pursuant to said AMLC Resolutions, Freeze Orders Nos. 008-010, 011 and 013 were issued
on different dates, addressed to the concerned banks;
(h) The facts and circumstances plainly showing that defendant Glasgows bank account and
deposit are related to the unlawful activities of Estafa and violation of Securities Regulation
Code, as well as to a money laundering offense [which] [has] been summarized by the AMLC in
its Resolution No. 094; and
(i) Because defendant Glasgows bank account and deposits are related to the unlawful activities
of Estafa and violation of Securities Regulation Code, as well as [to] money laundering offense
as aforestated, and being the subject of covered transaction reports and eventual freeze orders,
the same should properly be forfeited in favor of the government in accordance with Section
12, R.A. 9160, as amended.11
In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not
the veracity, of the material allegations.12 The determination is confined to the four corners of
the complaint and nowhere else.13
In a motion to dismiss a complaint based on lack of cause of action, the question submitted to
the court for determination is the sufficiency of the allegations made in the complaint to
constitute a cause of action and not whether those allegations of fact are true, for said motion
must hypothetically admit the truth of the facts alleged in the complaint.
The test of the sufficiency of the facts alleged in the complaint is whether or not, admitting the
facts alleged, the court could render a valid judgment upon the same in accordance with the
prayer of the complaint.14 (emphasis ours)
In this connection, Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 4. Contents of the petition for civil forfeiture. - The petition for civil forfeiture shall be
verified and contain the following allegations:
(a) The name and address of the respondent;
(b) A description with reasonable particularity of the monetary instrument, property, or
proceeds, and their location; and
(c) The acts or omissions prohibited by and the specific provisions of the Anti-Money Laundering
Act, as amended, which are alleged to be the grounds relied upon for the forfeiture of the
monetary instrument, property, or proceeds; and
[(d)] The reliefs prayed for.
Here, the verified complaint of the Republic contained the following allegations:
(a) the name and address of the primary defendant therein, Glasgow;15
(b) a description of the proceeds of Glasgows unlawful activities with particularity, as well as
the location thereof, account no. CA-005-10-000121-5 in the amount of P21,301,430.28
maintained with CSBI;
(c) the acts prohibited by and the specific provisions of RA 9160, as amended, constituting the
grounds for the forfeiture of the said proceeds. In particular, suspicious transaction reports
showed that Glasgow engaged in unlawful activities of estafa and violation of the Securities
Regulation Code (under Section 3(i)(9) and (13), RA 9160, as amended); the proceeds of the
unlawful activities were transacted and deposited with CSBI in account no. CA-005-10-000121-
5 thereby making them appear to have originated from legitimate sources; as such, Glasgow
296
engaged in money laundering (under Section 4, RA 9160, as amended); and the AMLC subjected
the account to freeze order and
(d) the reliefs prayed for, namely, the issuance of a TRO or writ of preliminary injunction and the
forfeiture of the account in favor of the government as well as other reliefs just and equitable
under the premises.
The form and substance of the Republics complaint substantially conformed with Section 4,
Title II of the Rule of Procedure in Cases of Civil Forfeiture.
Moreover, Section 12(a) of RA 9160, as amended, provides:
SEC. 12. Forfeiture Provisions.
(a) Civil Forfeiture. When there is a covered transaction report made, and the court has, in a
petition filed for the purpose ordered seizure of any monetary instrument or property, in whole
or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil
forfeiture shall apply.
In relation thereto, Rule 12.2 of the Revised Implementing Rules and Regulations of RA 9160, as
amended, states:
RULE 12
Forfeiture Provisions
xxx xxx xxx
Rule 12.2. When Civil Forfeiture May be Applied. When there is a SUSPICIOUS TRANSACTION
REPORT OR A COVERED TRANSACTION REPORT DEEMED SUSPICIOUS AFTER INVESTIGATION BY
THE AMLC, and the court has, in a petition filed for the purpose, ordered the seizure of any
monetary instrument or property, in whole or in part, directly or indirectly, related to said
report, the Revised Rules of Court on civil forfeiture shall apply.
RA 9160, as amended, and its implementing rules and regulations lay down two conditions when
applying for civil forfeiture:
(1) when there is a suspicious transaction report or a covered transaction report deemed
suspicious after investigation by the AMLC and
(2) the court has, in a petition filed for the purpose, ordered the seizure of any monetary
instrument or property, in whole or in part, directly or indirectly, related to said report.
It is the preliminary seizure of the property in question which brings it within the reach of the
judicial process.16 It is actually within the courts possession when it is submitted to the process
of the court.17 The injunctive writ issued on August 8, 2003 removed account no. CA-005-10-
000121-5 from the effective control of either Glasgow or CSBI or their representatives or agents
and subjected it to the process of the court.
Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by several suspicious
transaction reports and (2) placed under the control of the trial court upon the issuance of the
writ of preliminary injunction, the conditions provided in Section 12(a) of RA 9160, as amended,
were satisfied. Hence, the Republic, represented by the AMLC, properly instituted the complaint
for civil forfeiture.
Whether or not there is truth in the allegation that account no. CA-005-10-000121-5 contains
the proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The
complaint, however, did not even have to show or allege that Glasgow had been implicated in a
conviction for, or the commission of, the unlawful activities of estafa and violation of the
Securities Regulation Code.
A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil
forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an
essential element of civil forfeiture.
Section 6 of RA 9160, as amended, provides:
SEC. 6. Prosecution of Money Laundering.
(a) Any person may be charged with and convicted of both the offense of money laundering and
the unlawful activity as herein defined.
(b) Any proceeding relating to the unlawful activity shall be given precedence over the
prosecution of any offense or violation under this Act without prejudice to the freezing and
other remedies provided. (emphasis supplied)
Rule 6.1 of the Revised Implementing Rules and Regulations of RA 9160, as amended, states:
Rule 6.1. Prosecution of Money Laundering
297
(a) Any person may be charged with and convicted of both the offense of money laundering and
the unlawful activity as defined under Rule 3(i) of the AMLA.
(b) Any proceeding relating to the unlawful activity shall be given precedence over the
prosecution of any offense or violation under the AMLA without prejudice to the application ex-
parte by the AMLC to the Court of Appeals for a freeze order with respect to the monetary
instrument or property involved therein and resort to other remedies provided under the AMLA,
the Rules of Court and other pertinent laws and rules. (emphasis supplied)
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 27. No prior charge, pendency or conviction necessary. No prior criminal charge, pendency
of or conviction for an unlawful activity or money laundering offense is necessary for the
commencement or the resolution of a petition for civil forfeiture. (emphasis supplied)
Thus, regardless of the absence, pendency or outcome of a criminal prosecution for the unlawful
activity or for money laundering, an action for civil forfeiture may be separately and
independently prosecuted and resolved.
There Was No Failure
To Prosecute
The trial court faulted the Republic for its alleged failure to prosecute the case. Nothing could
be more erroneous.
Immediately after the complaint was filed, the trial court ordered its deputy sheriff/process
server to serve summons and notice of the hearing on the application for issuance of TRO and/or
writ of preliminary injunction. The subpoena to Glasgow was, however, returned unserved as
Glasgow "could no longer be found at its given address" and had moved out of the building since
August 1, 2002.
Meanwhile, after due hearing, the trial court issued a writ of preliminary injunction enjoining
Glasgow from removing, dissipating or disposing of the subject bank deposits and CSBI from
allowing any transaction on, withdrawal, transfer, removal, dissipation or disposition thereof.
As the summons on Glasgow was returned "unserved," and considering that its whereabouts
could not be ascertained despite diligent inquiry, the Republic filed a verified omnibus motion
for (a) issuance of alias summons and (b) leave of court to serve summons by publication on
October 8, 2003. While the trial court issued an alias summons in its order dated October 15,
2003, it kept quiet on the prayer for leave of court to serve summons by publication.
Subsequently, in an order dated January 30, 2004, the trial court archived the case for failure of
the Republic to cause the service of alias summons. The Republic filed an ex parte omnibus
motion to (a) reinstate the case and (b) resolve its pending motion for leave of court to serve
summons by publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and
directed the Republic to cause the service of the alias summons on Glasgow and CSBI within 15
days. However, it deferred its action on the Republics motion for leave of court to serve
summons by publication until a return was made on the alias summons.
Meanwhile, the Republic continued to exert efforts to obtain information from other
government agencies on the whereabouts or current status of respondent Glasgow if only to
save on expenses of publication of summons. Its efforts, however, proved futile. The records on
file with the Securities and Exchange Commission provided no information. Other inquiries
yielded negative results.
On July 12, 2004, the Republic received a copy of the sheriffs return dated June 30, 2004 stating
that the alias summons had been returned "unserved" as Glasgow was no longer holding office
at the given address since July 2002 and left no forwarding address. Still, no action was taken by
the trial court on the Republics motion for leave of court to serve summons by publication.
Thus, on August 11, 2005, the Republic filed a manifestation and ex parte motion to resolve its
motion for leave of court to serve summons by publication.
It was at that point that Glasgow filed a motion to dismiss by way of special appearance which
the Republic vigorously opposed. Strangely, to say the least, the trial court issued the assailed
order granting Glasgows motion.
Given these circumstances, how could the Republic be faulted for failure to prosecute the
complaint for civil forfeiture? While there was admittedly a delay in the proceeding, it could not
be entirely or primarily ascribed to the Republic. That Glasgows whereabouts could not be
ascertained was not only beyond the Republics control, it was also attributable to Glasgow
which left its principal office address without informing the Securities and Exchange Commission
or any official regulatory body (like the Bureau of Internal Revenue or the Department of Trade
and Industry) of its new address. Moreover, as early as October 8, 2003, the Republic was
already seeking leave of court to serve summons by publication.
In Marahay v. Melicor,18 this Court ruled:
298
While a court can dismiss a case on the ground of non prosequitur, the real test for the exercise
of such power is whether, under the circumstances, plaintiff is chargeable with want of due
diligence in failing to proceed with reasonable promptitude. In the absence of a pattern or
scheme to delay the disposition of the case or a wanton failure to observe the mandatory
requirement of the rules on the part of the plaintiff, as in the case at bar, courts should decide
to dispense with rather than wield their authority to dismiss. (emphasis supplied)
We see no pattern or scheme on the part of the Republic to delay the disposition of the case or
a wanton failure to observe the mandatory requirement of the rules. The trial court should not
have so eagerly wielded its power to dismiss the Republics complaint.
3. The notice shall likewise contain a proviso that, if no comment or opposition is filed within
the reglementary period, the court shall hear the case ex parte and render such judgment as
may be warranted by the facts alleged in the petition and its supporting evidence.
(b) Where the respondent is designated as an unknown owner or whenever his whereabouts
are unknown and cannot be ascertained by diligent inquiry, service may, by leave of court, be
effected upon him by publication of the notice of the petition in a newspaper of general
circulation in such places and for such time as the court may order. In the event that the cost of
publication exceeds the value or amount of the property to be forfeited by ten percent,
publication shall not be required. (emphasis supplied)

Service Of Summons
May Be By Publication
In Republic v. Sandiganbayan,19 this Court declared that the rule is settled that forfeiture
proceedings are actions in rem. While that case involved forfeiture proceedings under RA 1379,
the same principle applies in cases for civil forfeiture under RA 9160, as amended, since both
cases do not terminate in the imposition of a penalty but merely in the forfeiture of the
properties either acquired illegally or related to unlawful activities in favor of the State.
As an action in rem, it is a proceeding against the thing itself instead of against the person.20 In
actions in rem or quasi in rem, jurisdiction over the person of the defendant is not a prerequisite
to conferring jurisdiction on the court, provided that the court acquires jurisdiction over the
res.21 Nonetheless, summons must be served upon the defendant in order to satisfy the
requirements of due process.22 For this purpose, service may be made by publication as such
mode of service is allowed in actions in rem and quasi in rem.23
WHEREFORE, the petition is hereby GRANTED. The October 27, 2005 order of the Regional Trial
Court of Manila, Branch 47, in Civil Case No. 03-107319 is SET ASIDE. The August 11, 2005 motion
to dismiss of Glasgow Credit and Collection Services, Inc. is DENIED. And the complaint for
forfeiture of the Republic of the Philippines, represented by the Anti-Money Laundering Council,
is REINSTATED.
The case is hereby REMANDED to the Regional Trial Court of Manila, Branch 47 which shall
forthwith proceed with the case pursuant to the provisions of A.M. No. 05-11-04-SC. Pending
final determination of the case, the November 23, 2005 temporary restraining order issued by
this Court is hereby MAINTAINED.
SO ORDERED.

In this connection, Section 8, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:

Sec. 8. Notice and manner of service. - (a) The respondent shall be given notice of the petition
in the same manner as service of summons under Rule 14 of the Rules of Court and the following
rules:

1. The notice shall be served on respondent personally, or by any other means prescribed in
Rule 14 of the Rules of Court;

2. The notice shall contain: (i) the title of the case; (ii) the docket number; (iii) the cause of action;
and (iv) the relief prayed for; and

299
 G.R. No. 174629 February 14, 2008
REPUBLIC OF THE PHILIPPINES, Represented by THE ANTI-MONEY LAUNDERING COUNCIL
(AMLC), petitioner,
vs.
HON. ANTONIO M. EUGENIO, JR., AS PRESIDING JUDGE OF RTC, MANILA, BRANCH 34,
PANTALEON ALVAREZ and LILIA CHENG, respondents.
DECISION
TINGA, J.:
The present petition for certiorari and prohibition under Rule 65 assails the orders and
resolutions issued by two different courts in two different cases. The courts and cases in
question are the Regional Trial Court of Manila, Branch 24, which heard SP Case No. 06-1142001
and the Court of Appeals, Tenth Division, which heared CA-G.R. SP No. 95198.2 Both cases arose
as part of the aftermath of the ruling of this Court in Agan v. PIATCO3 nullifying the concession
agreement awarded to the Philippine International Airport Terminal Corporation (PIATCO) over
the Ninoy Aquino International Airport International Passenger Terminal 3 (NAIA 3) Project.
I.
Following the promulgation of Agan, a series of investigations concerning the award of the NAIA
3 contracts to PIATCO were undertaken by the Ombudsman and the Compliance and
Investigation Staff (CIS) of petitioner Anti-Money Laundering Council (AMLC). On 24 May 2005,
the Office of the Solicitor General (OSG) wrote the AMLC requesting the latters assistance "in
obtaining more evidence to completely reveal the financial trail of corruption surrounding the
[NAIA 3] Project," and also noting that petitioner Republic of the Philippines was presently
defending itself in two international arbitration cases filed in relation to the NAIA 3 Project.4
The CIS conducted an intelligence database search on the financial transactions of certain
individuals involved in the award, including respondent Pantaleon Alvarez (Alvarez) who had
been the Chairman of the PBAC Technical Committee, NAIA-IPT3 Project.5 By this time, Alvarez
had already been charged by the Ombudsman with violation of Section 3(j) of R.A. No. 3019.6
The search revealed that Alvarez maintained eight (8) bank accounts with six (6) different
banks.7
On 27 June 2005, the AMLC issued Resolution No. 75, Series of 2005,8 whereby the Council
resolved to authorize the Executive Director of the AMLC "to sign and verify an application to
inquire into and/or examine the [deposits] or investments of Pantaleon Alvarez, Wilfredo
Trinidad, Alfredo Liongson, and Cheng Yong, and their related web of accounts wherever these
may be found, as defined under Rule 10.4 of the Revised Implementing Rules and Regulations;"
and to authorize the AMLC Secretariat "to conduct an inquiry into subject accounts once the
Regional Trial Court grants the application to inquire into and/or examine the bank accounts" of
those four individuals.9 The resolution enumerated the particular bank accounts of Alvarez,
Wilfredo Trinidad (Trinidad), Alfredo Liongson (Liongson) and Cheng Yong which were to be the
subject of the inquiry.10 The rationale for the said resolution was founded on the cited findings
of the CIS that amounts were transferred from a Hong Kong bank account owned by Jetstream
Pacific Ltd. Account to bank accounts in the Philippines maintained by Liongson and Cheng
Yong.11 The Resolution also noted that "[b]y awarding the contract to PIATCO despite its lack
of financial capacity, Pantaleon Alvarez caused undue injury to the government by giving PIATCO
unwarranted benefits, advantage, or preference in the discharge of his official administrative
functions through manifest partiality, evident bad faith, or gross inexcusable negligence, in
violation of Section 3(e) of Republic Act No. 3019."12
Under the authority granted by the Resolution, the AMLC filed an application to inquire into or
examine the deposits or investments of Alvarez, Trinidad, Liongson and Cheng Yong before the
RTC of Makati, Branch 138, presided by Judge (now Court of Appeals Justice) Sixto Marella, Jr.
The application was docketed as AMLC No. 05-005.13 The Makati RTC heard the testimony of
the Deputy Director of the AMLC, Richard David C. Funk II, and received the documentary
evidence of the AMLC.14 Thereafter, on 4 July 2005, the Makati RTC rendered an Order (Makati
RTC bank inquiry order) granting the AMLC the authority to inquire and examine the subject
bank accounts of Alvarez, Trinidad, Liongson and Cheng Yong, the trial court being satisfied that
there existed "[p]robable cause [to] believe that the deposits in various bank accounts, details
of which appear in paragraph 1 of the Application, are related to the offense of violation of Anti-
Graft and Corrupt Practices Act now the subject of criminal prosecution before the
Sandiganbayan as attested to by the Informations, Exhibits C, D, E, F, and G."15 Pursuant to the
Makati RTC bank inquiry order, the CIS proceeded to inquire and examine the deposits,
investments and related web accounts of the four.16
Meanwhile, the Special Prosecutor of the Office of the Ombudsman, Dennis Villa-Ignacio, wrote
a letter dated 2 November 2005, requesting the AMLC to investigate the accounts of Alvarez,
PIATCO, and several other entities involved in the nullified contract. The letter adverted to
probable cause to believe that the bank accounts "were used in the commission of unlawful
activities that were committed" in relation to the criminal cases then pending before the
Sandiganbayan.17 Attached to the letter was a memorandum "on why the investigation of the
[accounts] is necessary in the prosecution of the above criminal cases before the
Sandiganbayan."18
In response to the letter of the Special Prosecutor, the AMLC promulgated on 9 December 2005
Resolution No. 121 Series of 2005,19 which authorized the executive director of the AMLC to
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inquire into and examine the accounts named in the letter, including one maintained by Alvarez
with DBS Bank and two other accounts in the name of Cheng Yong with Metrobank. The
Resolution characterized the memorandum attached to the Special Prosecutors letter as
"extensively justif[ying] the existence of probable cause that the bank accounts of the persons
and entities mentioned in the letter are related to the unlawful activity of violation of Sections
3(g) and 3(e) of Rep. Act No. 3019, as amended."20
Following the December 2005 AMLC Resolution, the Republic, through the AMLC, filed an
application21 before the Manila RTC to inquire into and/or examine thirteen (13) accounts and
two (2) related web of accounts alleged as having been used to facilitate corruption in the NAIA
3 Project. Among said accounts were the DBS Bank account of Alvarez and the Metrobank
accounts of Cheng Yong. The case was raffled to Manila RTC, Branch 24, presided by respondent
Judge Antonio Eugenio, Jr., and docketed as SP Case No. 06-114200.
On 12 January 2006, the Manila RTC issued an Order (Manila RTC bank inquiry order) granting
the Ex Parte Application expressing therein "[that] the allegations in said application to be
impressed with merit, and in conformity with Section 11 of R.A. No. 9160, as amended,
otherwise known as the Anti-Money Laundering Act (AMLA) of 2001 and Rules 11.1 and 11.2 of
the Revised Implementing Rules and Regulations."22 Authority was thus granted to the AMLC
to inquire into the bank accounts listed therein.
On 25 January 2006, Alvarez, through counsel, entered his appearance23 before the Manila RTC
in SP Case No. 06-114200 and filed an Urgent Motion to Stay Enforcement of Order of January
12, 2006.24 Alvarez alleged that he fortuitously learned of the bank inquiry order, which was
issued following an ex parte application, and he argued that nothing in R.A. No. 9160 authorized
the AMLC to seek the authority to inquire into bank accounts ex parte.25 The day after Alvarez
filed his motion, 26 January 2006, the Manila RTC issued an Order26 staying the enforcement of
its bank inquiry order and giving the Republic five (5) days to respond to Alvarezs motion.
The Republic filed an Omnibus Motion for Reconsideration27 of the 26 January 2006 Manila RTC
Order and likewise sought to strike out Alvarezs motion that led to the issuance of said order.
For his part, Alvarez filed a Reply and Motion to Dismiss28 the application for bank inquiry order.
On 2 May 2006, the Manila RTC issued an Omnibus Order29 granting the Republics Motion for
Reconsideration, denying Alvarezs motion to dismiss and reinstating "in full force and effect"
the Order dated 12 January 2006. In the omnibus order, the Manila RTC reiterated that the
material allegations in the application for bank inquiry order filed by the Republic stood as "the
probable cause for the investigation and examination of the bank accounts and investments of
the respondents."30
Alvarez filed on 10 May 2006 an Urgent Motion31 expressing his apprehension that the AMLC
would immediately enforce the omnibus order and would thereby render the motion for
reconsideration he intended to file as moot and academic; thus he sought that the Republic be
refrained from enforcing the omnibus order in the meantime. Acting on this motion, the Manila
RTC, on 11 May 2006, issued an Order32 requiring the OSG to file a comment/opposition and
reminding the parties that judgments and orders become final and executory upon the
expiration of fifteen (15) days from receipt thereof, as it is the period within which a motion for
reconsideration could be filed. Alvarez filed his Motion for Reconsideration33 of the omnibus
order on 15 May 2006, but the motion was denied by the Manila RTC in an Order34 dated 5 July
2006.
On 11 July 2006, Alvarez filed an Urgent Motion and Manifestation35 wherein he manifested
having received reliable information that the AMLC was about to implement the Manila RTC
bank inquiry order even though he was intending to appeal from it. On the premise that only a
final and executory judgment or order could be executed or implemented, Alvarez sought that
the AMLC be immediately ordered to refrain from enforcing the Manila RTC bank inquiry order.
On 12 July 2006, the Manila RTC, acting on Alvarezs latest motion, issued an Order36 directing
the AMLC "to refrain from enforcing the order dated January 12, 2006 until the expiration of the
period to appeal, without any appeal having been filed." On the same day, Alvarez filed a Notice
of Appeal37 with the Manila RTC.
On 24 July 2006, Alvarez filed an Urgent Ex Parte Motion for Clarification.38 Therein, he alleged
having learned that the AMLC had began to inquire into the bank accounts of the other persons
mentioned in the application for bank inquiry order filed by the Republic.39 Considering that
the Manila RTC bank inquiry order was issued ex parte, without notice to those other persons,
Alvarez prayed that the AMLC be ordered to refrain from inquiring into any of the other bank
deposits and alleged web of accounts enumerated in AMLCs application with the RTC; and that
the AMLC be directed to refrain from using, disclosing or publishing in any proceeding or venue
any information or document obtained in violation of the 11 May 2006 RTC Order.40
On 25 July 2006, or one day after Alvarez filed his motion, the Manila RTC issued an Order41
wherein it clarified that "the Ex Parte Order of this Court dated January 12, 2006 can not be
implemented against the deposits or accounts of any of the persons enumerated in the AMLC
Application until the appeal of movant Alvarez is finally resolved, otherwise, the appeal would
be rendered moot and academic or even nugatory."42 In addition, the AMLC was ordered "not
to disclose or publish any information or document found or obtained in [v]iolation of the May
11, 2006 Order of this Court."43 The Manila RTC reasoned that the other persons mentioned in
AMLCs application were not served with the courts 12 January 2006 Order. This 25 July 2006
Manila RTC Order is the first of the four rulings being assailed through this petition.
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In response, the Republic filed an Urgent Omnibus Motion for Reconsideration44 dated 27 July
2006, urging that it be allowed to immediately enforce the bank inquiry order against Alvarez
and that Alvarezs notice of appeal be expunged from the records since appeal from an order of
inquiry is disallowed under the Anti money Laundering Act (AMLA).
Meanwhile, respondent Lilia Cheng filed with the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus with Application for TRO and/or Writ of Preliminary Injunction45
dated 10 July 2006, directed against the Republic of the Philippines through the AMLC, Manila
RTC Judge Eugenio, Jr. and Makati RTC Judge Marella, Jr.. She identified herself as the wife of
Cheng Yong46 with whom she jointly owns a conjugal bank account with Citibank that is covered
by the Makati RTC bank inquiry order, and two conjugal bank accounts with Metrobank that are
covered by the Manila RTC bank inquiry order. Lilia Cheng imputed grave abuse of discretion on
the part of the Makati and Manila RTCs in granting AMLCs ex parte applications for a bank
inquiry order, arguing among others that the ex parte applications violated her constitutional
right to due process, that the bank inquiry order under the AMLA can only be granted in
connection with violations of the AMLA and that the AMLA can not apply to bank accounts
opened and transactions entered into prior to the effectivity of the AMLA or to bank accounts
located outside the Philippines.47
On 1 August 2006, the Court of Appeals, acting on Lilia Chengs petition, issued a Temporary
Restraining Order48 enjoining the Manila and Makati trial courts from implementing, enforcing
or executing the respective bank inquiry orders previously issued, and the AMLC from enforcing
and implementing such orders. On even date, the Manila RTC issued an Order49 resolving to
hold in abeyance the resolution of the urgent omnibus motion for reconsideration then pending
before it until the resolution of Lilia Chengs petition for certiorari with the Court of Appeals.
The Court of Appeals Resolution directing the issuance of the temporary restraining order is the
second of the four rulings assailed in the present petition.
The third assailed ruling50 was issued on 15 August 2006 by the Manila RTC, acting on the
Urgent Motion for Clarification51 dated 14 August 2006 filed by Alvarez. It appears that the 1
August 2006 Manila RTC Order had amended its previous 25 July 2006 Order by deleting the last
paragraph which stated that the AMLC "should not disclose or publish any information or
document found or obtained in violation of the May 11, 2006 Order of this Court."52 In this new
motion, Alvarez argued that the deletion of that paragraph would allow the AMLC to implement
the bank inquiry orders and publish whatever information it might obtain thereupon even
before the final orders of the Manila RTC could become final and executory.53 In the 15 August
2006 Order, the Manila RTC reiterated that the bank inquiry order it had issued could not be
implemented or enforced by the AMLC or any of its representatives until the appeal therefrom
was finally resolved and that any enforcement thereof would be unauthorized.54
The present Consolidated Petition55 for certiorari and prohibition under Rule 65 was filed on 2
October 2006, assailing the two Orders of the Manila RTC dated 25 July and 15 August 2006 and
the Temporary Restraining Order dated 1 August 2006 of the Court of Appeals. Through an
Urgent Manifestation and Motion56 dated 9 October 2006, petitioner informed the Court that
on 22 September 2006, the Court of Appeals hearing Lilia Chengs petition had granted a writ of
preliminary injunction in her favor.57 Thereafter, petitioner sought as well the nullification of
the 22 September 2006 Resolution of the Court of Appeals, thereby constituting the fourth
ruling assailed in the instant petition.58
The Court had initially granted a Temporary Restraining Order59 dated 6 October 2006 and later
on a Supplemental Temporary Restraining Order60 dated 13 October 2006 in petitioners favor,
enjoining the implementation of the assailed rulings of the Manila RTC and the Court of Appeals.
However, on respondents motion, the Court, through a Resolution61 dated 11 December 2006,
suspended the implementation of the restraining orders it had earlier issued.
Oral arguments were held on 17 January 2007. The Court consolidated the issues for argument
as follows:
1. Did the RTC-Manila, in issuing the Orders dated 25 July 2006 and 15 August 2006 which
deferred the implementation of its Order dated 12 January 2006, and the Court of Appeals, in
issuing its Resolution dated 1 August 2006, which ordered the status quo in relation to the 1 July
2005 Order of the RTC-Makati and the 12 January 2006 Order of the RTC-Manila, both of which
authorized the examination of bank accounts under Section 11 of Rep. Act No. 9160 (AMLA),
commit grave abuse of discretion?
(a) Is an application for an order authorizing inquiry into or examination of bank accounts or
investments under Section 11 of the AMLA ex-parte in nature or one which requires notice and
hearing?
(b) What legal procedures and standards should be observed in the conduct of the proceedings
for the issuance of said order?
(c) Is such order susceptible to legal challenges and judicial review?
2. Is it proper for this Court at this time and in this case to inquire into and pass upon the validity
of the 1 July 2005 Order of the RTC-Makati and the 12 January 2006 Order of the RTC-Manila,
considering the pendency of CA G.R. SP No. 95-198 (Lilia Cheng v. Republic) wherein the validity
of both orders was challenged?62
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After the oral arguments, the parties were directed to file their respective memoranda, which
they did,63 and the petition was thereafter deemed submitted for resolution.
II.
Petitioners general advocacy is that the bank inquiry orders issued by the Manila and Makati
RTCs are valid and immediately enforceable whereas the assailed rulings, which effectively
stayed the enforcement of the Manila and Makati RTCs bank inquiry orders, are sullied with
grave abuse of discretion. These conclusions flow from the posture that a bank inquiry order,
issued upon a finding of probable cause, may be issued ex parte and, once issued, is immediately
executory. Petitioner further argues that the information obtained following the bank inquiry is
necessarily beneficial, if not indispensable, to the AMLC in discharging its awesome
responsibility regarding the effective implementation of the AMLA and that any restraint in the
disclosure of such information to appropriate agencies or other judicial fora would render
meaningless the relief supplied by the bank inquiry order.
Petitioner raises particular arguments questioning Lilia Chengs right to seek injunctive relief
before the Court of Appeals, noting that not one of the bank inquiry orders is directed against
her. Her "cryptic assertion" that she is the wife of Cheng Yong cannot, according to petitioner,
"metamorphose into the requisite legal standing to seek redress for an imagined injury or to
maintain an action in behalf of another." In the same breath, petitioner argues that Alvarez
cannot assert any violation of the right to financial privacy in behalf of other persons whose
bank accounts are being inquired into, particularly those other persons named in the Makati
RTC bank inquiry order who did not take any step to oppose such orders before the courts.
Ostensibly, the proximate question before the Court is whether a bank inquiry order issued in
accordance with Section 10 of the AMLA may be stayed by injunction. Yet in arguing that it does,
petitioner relies on what it posits as the final and immediately executory character of the bank
inquiry orders issued by the Manila and Makati RTCs. Implicit in that position is the notion that
the inquiry orders are valid, and such notion is susceptible to review and validation based on
what appears on the face of the orders and the applications which triggered their issuance, as
well as the provisions of the AMLA governing the issuance of such orders. Indeed, to test the
viability of petitioners argument, the Court will have to be satisfied that the subject inquiry
orders are valid in the first place. However, even from a cursory examination of the applications
for inquiry order and the orders themselves, it is evident that the orders are not in accordance
with law.
III.
A brief overview of the AMLA is called for.
Money laundering has been generally defined by the International Criminal Police Organization
(Interpol) `as "any act or attempted act to conceal or disguise the identity of illegally obtained
proceeds so that they appear to have originated from legitimate sources."64 Even before the
passage of the AMLA, the problem was addressed by the Philippine government through the
issuance of various circulars by the Bangko Sentral ng Pilipinas. Yet ultimately, legislative
proscription was necessary, especially with the inclusion of the Philippines in the Financial
Action Task Forces list of non-cooperative countries and territories in the fight against money
laundering.65 The original AMLA, Republic Act (R.A.) No. 9160, was passed in 2001. It was
amended by R.A. No. 9194 in 2003.
Section 4 of the AMLA states that "[m]oney laundering is a crime whereby the proceeds of an
unlawful activity as [defined in the law] are transacted, thereby making them appear to have
originated from legitimate sources."66 The section further provides the three modes through
which the crime of money laundering is committed. Section 7 creates the AMLC and defines its
powers, which generally relate to the enforcement of the AMLA provisions and the initiation of
legal actions authorized in the AMLA such as civil forefeiture proceedings and complaints for the
prosecution of money laundering offenses.67
In addition to providing for the definition and penalties for the crime of money laundering, the
AMLA also authorizes certain provisional remedies that would aid the AMLC in the enforcement
of the AMLA. These are the "freeze order" authorized under Section 10, and the "bank inquiry
order" authorized under Section 11.
Respondents posit that a bank inquiry order under Section 11 may be obtained only upon the
pre-existence of a money laundering offense case already filed before the courts.68 The
conclusion is based on the phrase "upon order of any competent court in cases of violation of
this Act," the word "cases" generally understood as referring to actual cases pending with the
courts.
We are unconvinced by this proposition, and agree instead with the then Solicitor General who
conceded that the use of the phrase "in cases of" was unfortunate, yet submitted that it should
be interpreted to mean "in the event there are violations" of the AMLA, and not that there are
already cases pending in court concerning such violations.69 If the contrary position is adopted,
then the bank inquiry order would be limited in purpose as a tool in aid of litigation of live cases,
and wholly inutile as a means for the government to ascertain whether there is sufficient
evidence to sustain an intended prosecution of the account holder for violation of the AMLA.
Should that be the situation, in all likelihood the AMLC would be virtually deprived of its
character as a discovery tool, and thus would become less circumspect in filing complaints
against suspect account holders. After all, under such set-up the preferred strategy would be to
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allow or even encourage the indiscriminate filing of complaints under the AMLA with the hope
or expectation that the evidence of money laundering would somehow surface during the trial.
Since the AMLC could not make use of the bank inquiry order to determine whether there is
evidentiary basis to prosecute the suspected malefactors, not filing any case at all would not be
an alternative. Such unwholesome set-up should not come to pass. Thus Section 11 cannot be
interpreted in a way that would emasculate the remedy it has established and encourage the
unfounded initiation of complaints for money laundering.
Still, even if the bank inquiry order may be availed of without need of a pre-existing case under
the AMLA, it does not follow that such order may be availed of ex parte. There are several
reasons why the AMLA does not generally sanction ex parte applications and issuances of the
bank inquiry order.
IV.
It is evident that Section 11 does not specifically authorize, as a general rule, the issuance ex
parte of the bank inquiry order. We quote the provision in full:
SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the provisions of Republic
Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other
laws, the AMLC may inquire into or examine any particular deposit or investment with any
banking institution or non bank financial institution upon order of any competent court in cases
of violation of this Act, when it has been established that there is probable cause that the
deposits or investments are related to an unlawful activity as defined in Section 3(i) hereof or a
money laundering offense under Section 4 hereof, except that no court order shall be required
in cases involving unlawful activities defined in Sections 3(i)1, (2) and (12).
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into or
examine any deposit of investment with any banking institution or non bank financial institution
when the examination is made in the course of a periodic or special examination, in accordance
with the rules of examination of the BSP.70 (Emphasis supplied)
Of course, Section 11 also allows the AMLC to inquire into bank accounts without having to
obtain a judicial order in cases where there is probable cause that the deposits or investments
are related to kidnapping for ransom,71 certain violations of the Comprehensive Dangerous
Drugs Act of 2002,72 hijacking and other violations under R.A. No. 6235, destructive arson and
murder. Since such special circumstances do not apply in this case, there is no need for us to
pass comment on this proviso. Suffice it to say, the proviso contemplates a situation distinct
from that which presently confronts us, and for purposes of the succeeding discussion, our
reference to Section 11 of the AMLA excludes said proviso.
In the instances where a court order is required for the issuance of the bank inquiry order,
nothing in Section 11 specifically authorizes that such court order may be issued ex parte. It
might be argued that this silence does not preclude the ex parte issuance of the bank inquiry
order since the same is not prohibited under Section 11. Yet this argument falls when the
immediately preceding provision, Section 10, is examined.
SEC. 10. Freezing of Monetary Instrument or Property. The Court of Appeals, upon application
ex parte by the AMLC and after determination that probable cause exists that any monetary
instrument or property is in any way related to an unlawful activity as defined in Section 3(i)
hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be
for a period of twenty (20) days unless extended by the court.73
Although oriented towards different purposes, the freeze order under Section 10 and the bank
inquiry order under Section 11 are similar in that they are extraordinary provisional reliefs which
the AMLC may avail of to effectively combat and prosecute money laundering offenses.
Crucially, Section 10 uses specific language to authorize an ex parte application for the
provisional relief therein, a circumstance absent in Section 11. If indeed the legislature had
intended to authorize ex parte proceedings for the issuance of the bank inquiry order, then it
could have easily expressed such intent in the law, as it did with the freeze order under Section
10.
Even more tellingly, the current language of Sections 10 and 11 of the AMLA was crafted at the
same time, through the passage of R.A. No. 9194. Prior to the amendatory law, it was the AMLC,
not the Court of Appeals, which had authority to issue a freeze order, whereas a bank inquiry
order always then required, without exception, an order from a competent court.74 It was
through the same enactment that ex parte proceedings were introduced for the first time into
the AMLA, in the case of the freeze order which now can only be issued by the Court of Appeals.
It certainly would have been convenient, through the same amendatory law, to allow a similar
ex parte procedure in the case of a bank inquiry order had Congress been so minded. Yet nothing
in the provision itself, or even the available legislative record, explicitly points to an ex parte
judicial procedure in the application for a bank inquiry order, unlike in the case of the freeze
order.
That the AMLA does not contemplate ex parte proceedings in applications for bank inquiry
orders is confirmed by the present implementing rules and regulations of the AMLA,
promulgated upon the passage of R.A. No. 9194. With respect to freeze orders under Section
10, the implementing rules do expressly provide that the applications for freeze orders be filed
ex parte,75 but no similar clearance is granted in the case of inquiry orders under Section 11.76
These implementing rules were promulgated by the Bangko Sentral ng Pilipinas, the Insurance
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Commission and the Securities and Exchange Commission,77 and if it was the true belief of these
institutions that inquiry orders could be issued ex parte similar to freeze orders, language to that
effect would have been incorporated in the said Rules. This is stressed not because the
implementing rules could authorize ex parte applications for inquiry orders despite the absence
of statutory basis, but rather because the framers of the law had no intention to allow such ex
parte applications.
Even the Rules of Procedure adopted by this Court in A.M. No. 05-11-04-SC78 to enforce the
provisions of the AMLA specifically authorize ex parte applications with respect to freeze orders
under Section 1079 but make no similar authorization with respect to bank inquiry orders under
Section 11.
The Court could divine the sense in allowing ex parte proceedings under Section 10 and in
proscribing the same under Section 11. A freeze order under Section 10 on the one hand is aimed
at preserving monetary instruments or property in any way deemed related to unlawful
activities as defined in Section 3(i) of the AMLA. The owner of such monetary instruments or
property would thus be inhibited from utilizing the same for the duration of the freeze order.
To make such freeze order anteceded by a judicial proceeding with notice to the account holder
would allow for or lead to the dissipation of such funds even before the order could be issued.
On the other hand, a bank inquiry order under Section 11 does not necessitate any form of
physical seizure of property of the account holder. What the bank inquiry order authorizes is the
examination of the particular deposits or investments in banking institutions or non-bank
financial institutions. The monetary instruments or property deposited with such banks or
financial institutions are not seized in a physical sense, but are examined on particular details
such as the account holders record of deposits and transactions. Unlike the assets subject of
the freeze order, the records to be inspected under a bank inquiry order cannot be physically
seized or hidden by the account holder. Said records are in the possession of the bank and
therefore cannot be destroyed at the instance of the account holder alone as that would require
the extraordinary cooperation and devotion of the bank.
Interestingly, petitioners memorandum does not attempt to demonstrate before the Court that
the bank inquiry order under Section 11 may be issued ex parte, although the petition itself did
devote some space for that argument. The petition argues that the bank inquiry order is "a
special and peculiar remedy, drastic in its name, and made necessary because of a public
necessity [t]hus, by its very nature, the application for an order or inquiry must necessarily, be
ex parte." This argument is insufficient justification in light of the clear disinclination of Congress
to allow the issuance ex parte of bank inquiry orders under Section 11, in contrast to the
legislatures clear inclination to allow the ex parte grant of freeze orders under Section 10.
Without doubt, a requirement that the application for a bank inquiry order be done with notice
to the account holder will alert the latter that there is a plan to inspect his bank account on the
belief that the funds therein are involved in an unlawful activity or money laundering offense.80
Still, the account holder so alerted will in fact be unable to do anything to conceal or cleanse his
bank account records of suspicious or anomalous transactions, at least not without the whole-
hearted cooperation of the bank, which inherently has no vested interest to aid the account
holder in such manner.
V.
The necessary implication of this finding that Section 11 of the AMLA does not generally
authorize the issuance ex parte of the bank inquiry order would be that such orders cannot be
issued unless notice is given to the owners of the account, allowing them the opportunity to
contest the issuance of the order. Without such a consequence, the legislated distinction
between ex parte proceedings under Section 10 and those which are not ex parte under Section
11 would be lost and rendered useless.
There certainly is fertile ground to contest the issuance of an ex parte order. Section 11 itself
requires that it be established that "there is probable cause that the deposits or investments
are related to unlawful activities," and it obviously is the court which stands as arbiter whether
there is indeed such probable cause. The process of inquiring into the existence of probable
cause would involve the function of determination reposed on the trial court. Determination
clearly implies a function of adjudication on the part of the trial court, and not a mechanical
application of a standard pre-determination by some other body. The word "determination"
implies deliberation and is, in normal legal contemplation, equivalent to "the decision of a court
of justice."81
The court receiving the application for inquiry order cannot simply take the AMLCs word that
probable cause exists that the deposits or investments are related to an unlawful activity. It will
have to exercise its
own determinative function in order to be convinced of such fact. The account holder would be
certainly capable of contesting such probable cause if given the opportunity to be apprised of
the pending application to inquire into his account; hence a notice requirement would not be
an empty spectacle. It may be so that the process of obtaining the inquiry order may become
more cumbersome or prolonged because of the notice requirement, yet we fail to see any
unreasonable burden cast by such circumstance. After all, as earlier stated, requiring notice to
the account holder should not, in any way, compromise the integrity of the bank records subject
of the inquiry which remain in the possession and control of the bank.
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Petitioner argues that a bank inquiry order necessitates a finding of probable cause, a
characteristic similar to a search warrant which is applied to and heard ex parte. We have
examined the supposed analogy between a search warrant and a bank inquiry order yet we
remain to be unconvinced by petitioner.
The Constitution and the Rules of Court prescribe particular requirements attaching to search
warrants that are not imposed by the AMLA with respect to bank inquiry orders. A constitutional
warrant requires that the judge personally examine under oath or affirmation the complainant
and the witnesses he may produce,82 such examination being in the form of searching questions
and answers.83 Those are impositions which the legislative did not specifically prescribe as to
the bank inquiry order under the AMLA, and we cannot find sufficient legal basis to apply them
to Section 11 of the AMLA. Simply put, a bank inquiry order is not a search warrant or warrant
of arrest as it contemplates a direct object but not the seizure of persons or property.
Even as the Constitution and the Rules of Court impose a high procedural standard for the
determination of probable cause for the issuance of search warrants which Congress chose not
to prescribe for the bank inquiry order under the AMLA, Congress nonetheless disallowed ex
parte applications for the inquiry order. We can discern that in exchange for these procedural
standards normally applied to search warrants, Congress chose instead to legislate a right to
notice and a right to be heard characteristics of judicial proceedings which are not ex parte.
Absent any demonstrable constitutional infirmity, there is no reason for us to dispute such
legislative policy choices.
VI.
The Courts construction of Section 11 of the AMLA is undoubtedly influenced by right to privacy
considerations. If sustained, petitioners argument that a bank account may be inspected by the
government following an ex parte proceeding about which the depositor would know nothing
would have significant implications on the right to privacy, a right innately cherished by all
notwithstanding the legally recognized exceptions thereto. The notion that the government
could be so empowered is cause for concern of any individual who values the right to privacy
which, after all, embodies even the right to be "let
alone," the most comprehensive of rights and the right most valued by civilized people.84
One might assume that the constitutional dimension of the right to privacy, as applied to bank
deposits, warrants our present inquiry. We decline to do so. Admittedly, that question has
proved controversial in American jurisprudence. Notably, the United States Supreme Court in
U.S. v. Miller85 held that there was no legitimate expectation of privacy as to the bank records
of a depositor.86 Moreover, the text of our Constitution has not bothered with the triviality of
allocating specific rights peculiar to bank deposits.
However, sufficient for our purposes, we can assert there is a right to privacy governing bank
accounts in the Philippines, and that such right finds application to the case at bar. The source
of such right is statutory, expressed as it is in R.A. No. 1405 otherwise known as the Bank Secrecy
Act of 1955. The right to privacy is enshrined in Section 2 of that law, to wit:
SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the litigation.
(Emphasis supplied)
Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a basic state policy
in the Philippines.87 Subsequent laws, including the AMLA, may have added exceptions to the
Bank Secrecy Act, yet the secrecy of bank deposits still lies as the general rule. It falls within the
zones of privacy recognized by our laws.88 The framers of the 1987 Constitution likewise
recognized that bank accounts are not covered by either the right to information89 under
Section 7, Article III or under the requirement of full public disclosure90 under Section 28, Article
II.91 Unless the Bank Secrecy Act is repealed or
amended, the legal order is obliged to conserve the absolutely confidential nature of Philippine
bank deposits.
Any exception to the rule of absolute confidentiality must be specifically legislated. Section 2 of
the Bank Secrecy Act itself prescribes exceptions whereby these bank accounts may be
examined by "any person, government official, bureau or office"; namely when: (1) upon written
permission of the depositor; (2) in cases of impeachment; (3) the examination of bank accounts
is upon order of a competent court in cases of bribery or dereliction of duty of public officials;
and (4) the money deposited or invested is the subject matter of the litigation. Section 8 of R.A.
Act No. 3019, the Anti-Graft and Corrupt Practices Act, has been recognized by this Court as
constituting an additional exception to the rule of absolute confidentiality,92 and there have
been other similar recognitions as well.93
The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may
inquire into a bank account upon order of any competent court in cases of violation of the AMLA,
306
it having been established that there is probable cause that the deposits or investments are
related to unlawful activities as defined in Section 3(i) of the law, or a money laundering offense
under Section 4 thereof. Further, in instances where there is probable cause that the deposits
or investments are related to kidnapping for ransom,94 certain violations of the Comprehensive
Dangerous Drugs Act of 2002,95 hijacking and other violations under R.A. No. 6235, destructive
arson and murder, then there is no need for the AMLC to obtain a court order before it could
inquire into such accounts.
It cannot be successfully argued the proceedings relating to the bank inquiry order under Section
11 of the AMLA is a "litigation" encompassed in one of the exceptions to the Bank Secrecy Act
which is when "the money deposited or invested is the subject matter of the litigation." The
orientation of the bank inquiry order is simply to serve as a provisional relief or remedy. As
earlier stated, the application for such does not entail a full-blown trial.
Nevertheless, just because the AMLA establishes additional exceptions to the Bank Secrecy Act
it does not mean that the later law has dispensed with the general principle established in the
older law that "[a]ll deposits of whatever nature with banks or banking institutions in the
Philippines x x x are hereby considered as of an absolutely confidential nature."96 Indeed, by
force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even
by the legislated exceptions referred to above. There is disfavor towards construing these
exceptions in such a manner that would authorize unlimited discretion on the part of the
government or of any party seeking to enforce those exceptions and inquire into bank deposits.
If there are doubts in upholding the absolutely confidential nature of bank deposits against
affirming the authority to inquire into such accounts, then such doubts must be resolved in favor
of the former. Such a stance would persist unless Congress passes a law reversing the general
state policy of preserving the absolutely confidential nature of Philippine bank accounts.
The presence of this statutory right to privacy addresses at least one of the arguments raised by
petitioner, that Lilia Cheng had no personality to assail the inquiry orders before the Court of
Appeals because she was not the subject of said orders. AMLC Resolution No. 75, which served
as the basis in the successful application for the Makati inquiry order, expressly adverts to
Citibank Account No. 88576248 "owned by Cheng Yong and/or Lilia G. Cheng with Citibank
N.A.,"97 whereas Lilia Chengs petition before the Court of Appeals is accompanied by a
certification from Metrobank that Account Nos. 300852436-0 and 700149801-7, both of which
are among the subjects of the Manila inquiry order, are accounts in the name of "Yong Cheng
or Lilia Cheng."98 Petitioner does not specifically deny that Lilia Cheng holds rights of ownership
over the three said accounts, laying focus instead on the fact that she was not named as a
subject of either the Makati or Manila RTC inquiry orders. We are reasonably convinced that
Lilia Cheng has sufficiently demonstrated her joint ownership of the three accounts, and such
conclusion leads us to acknowledge that she has the standing to assail via certiorari the inquiry
orders authorizing the examination of her bank accounts as the orders interfere with her
statutory right to maintain the secrecy of said accounts.
While petitioner would premise that the inquiry into Lilia Chengs accounts finds root in Section
11 of the AMLA, it cannot be denied that the authority to inquire under Section 11 is only
exceptional in character, contrary as it is to the general rule preserving the secrecy of bank
deposits. Even though she may not have been the subject of the inquiry orders, her bank
accounts nevertheless were, and she thus has the standing to vindicate the right to secrecy that
attaches to said accounts and their owners. This statutory right to privacy will not prevent the
courts from authorizing the inquiry anyway upon the fulfillment of the requirements set forth
under Section 11 of the AMLA or Section 2 of the Bank Secrecy Act; at the same time, the owner
of the accounts have the right to challenge whether the requirements were indeed complied
with.
VII.
There is a final point of concern which needs to be addressed. Lilia Cheng argues that the AMLA,
being a substantive penal statute, has no retroactive effect and the bank inquiry order could not
apply to deposits or investments opened prior to the effectivity of Rep. Act No. 9164, or on 17
October 2001. Thus, she concludes, her subject bank accounts, opened between 1989 to 1990,
could not be the subject of the bank inquiry order lest there be a violation of the constitutional
prohibition against ex post facto laws.
No ex post facto law may be enacted,99 and no law may be construed in such fashion as to
permit a criminal prosecution offensive to the ex post facto clause. As applied to the AMLA, it is
plain that no person may be prosecuted under the penal provisions of the AMLA for acts
committed prior to the enactment of the law on 17 October 2001. As much was understood by
the lawmakers since they deliberated upon the AMLA, and indeed there is no serious dispute on
that point.
Does the proscription against ex post facto laws apply to the interpretation of Section 11, a
provision which does not provide for a penal sanction but which merely authorizes the
inspection of suspect accounts and deposits? The answer is in the affirmative. In this jurisdiction,
we have defined an ex post facto law as one which either:
(1) makes criminal an act done before the passage of the law and which was innocent when
done, and punishes such an act;
(2) aggravates a crime, or makes it greater than it was, when committed;
307
(3) changes the punishment and inflicts a greater punishment than the law annexed to the crime
when committed;
(4) alters the legal rules of evidence, and authorizes conviction upon less or different testimony
than the law required at the time of the commission of the offense;
(5) assuming to regulate civil rights and remedies only, in effect imposes penalty or deprivation
of a right for something which when done was lawful; and
(6) deprives a person accused of a crime of some lawful protection to which he has become
entitled, such as the protection of a former conviction or acquittal, or a proclamation of
amnesty. (Emphasis supplied)100
Prior to the enactment of the AMLA, the fact that bank accounts or deposits were involved in
activities later on enumerated in Section 3 of the law did not, by itself, remove such accounts
from the shelter of absolute confidentiality. Prior to the AMLA, in order that bank accounts could
be examined, there was need to secure either the written permission of the depositor or a court
order authorizing such examination, assuming that they were involved in cases of bribery or
dereliction of duty of public officials, or in a case where the money deposited or invested was
itself the subject matter of the litigation. The passage of the AMLA stripped another layer off
the rule on absolute confidentiality that provided a measure of lawful protection to the account
holder. For that reason, the application of the bank inquiry order as a means of inquiring into
records of transactions entered into prior to the passage of the AMLA would be constitutionally
infirm, offensive as it is to the ex post facto clause.
Besides, nowhere in the legislative record cited by Lilia Cheng does it appear that there was an
unequivocal intent to exempt from the bank inquiry order all bank accounts opened prior to the
passage of the AMLA. There is a cited exchange between Representatives Ronaldo Zamora and
Jaime Lopez where the latter confirmed to the former that "deposits are supposed to be
exempted from scrutiny or monitoring if they are already in place as of the time the law is
enacted."102 That statement does indicate that transactions already in place when the AMLA
was passed are indeed exempt from scrutiny through a bank inquiry order, but it cannot yield
any interpretation that records of transactions undertaken after the enactment of the AMLA are
similarly exempt. Due to the absence of cited authority from the legislative record that
unqualifiedly supports respondent Lilia Chengs thesis, there is no cause for us to sustain her
interpretation of the AMLA, fatal as it is to the anima of that law.
IX.
We are well aware that Lilia Chengs petition presently pending before the Court of Appeals
likewise assails the validity of the subject bank inquiry orders and precisely seeks the annulment
of said orders. Our current declarations may indeed have the effect of preempting that0
petition. Still, in order for this Court to rule on the petition at bar which insists on the
enforceability of the said bank inquiry orders, it is necessary for us to consider and rule on the
same question which after all is a pure question of law.
WHEREFORE, the PETITION is DISMISSED. No pronouncement as to costs.
SO ORDERED.

Still, we must note that the position submitted by Lilia Cheng is much broader than what we are
willing to affirm. She argues that the proscription against ex post facto laws goes as far as to
prohibit any inquiry into deposits or investments included in bank accounts opened prior to the
effectivity of the AMLA even if the suspect transactions were entered into when the law had
already taken effect. The Court recognizes that if this argument were to be affirmed, it would
create a horrible loophole in the AMLA that would in turn supply the means to fearlessly engage
in money laundering in the Philippines; all that the criminal has to do is to make sure that the
money laundering activity is facilitated through a bank account opened prior to 2001. Lilia Cheng
admits that "actual money launderers could utilize the ex post facto provision of the
Constitution as a shield" but that the remedy lay with Congress to amend the law. We can hardly
presume that Congress intended to enact a self-defeating law in the first place, and the courts
are inhibited from such a construction by the cardinal rule that "a law should be interpreted
with a view to upholding rather than destroying it."101

308
 G.R. Nos. 164368-69 April 2, 2009
PEOPLE OF THE PHILIPPINES, Petitioner,
vs.
JOSEPH EJERCITO ESTRADA and THE HONORABLE SPECIAL DIVISION OF THE
SANDIGANBAYAN, Respondents.
DECISION
BRION, J.:
The People of the Philippines (the People) filed this Petition for Review on Certiorari1 to seek
the reversal of the Sandiganbayans Joint Resolution dated July 12, 2004, granting respondent
Joseph Ejercito Estradas (Estrada) demurrer to evidence in Crim. Case No. 26565.2
THE FACTS
On April 4, 2001, an Information for plunder (docketed as Crim. Case No. 26558) was filed with
the Sandiganbayan against respondent Estrada, among other accused. A separate Information
for illegal use of alias, docketed as Crim. Case No. 26565, was likewise filed against Estrada. The
Amended Information in Crim. Case No. 26565 reads:
That on or about 04 February 2000, or sometime prior or subsequent thereto, in the City of
Manila, Philippines and within the jurisdiction of this Honorable Court, the above-named
accused, being then President of the Republic of the Philippines, without having been duly
authorized, judicially or administratively, taking advantage of his position and committing the
offense in relation to office, i.e., in order to CONCEAL THE ill-gotten wealth HE ACQUIRED during
his tenure and his true identity as THE President of the Republic of the Philippines, did then and
there, willfully, unlawfully and criminally REPRESENT HIMSELF AS JOSE VELARDE IN SEVERAL
TRANSACTIONS AND use and employ the SAID alias "Jose Velarde" which IS neither his
registered name at birth nor his baptismal name, in signing documents with Equitable PCI Bank
and/or other corporate entities.
CONTRARY TO LAW.
Crim. Case Nos. 26565 and 26558 were subsequently consolidated for joint trial. Still another
Information, this time for perjury and docketed as Crim. Case No. 26905, was filed with the
Sandiganbayan against Estrada. This was later consolidated, too, with Crim. Cases No. 26558
and 26565.
Estrada was subsequently arrested on the basis of a warrant of arrest that the Sandiganbayan
issued.
On January 11, 2005, we ordered the creation of a Special Division in the Sandiganbayan to try,
hear, and decide the charges of plunder and related cases (illegal use of alias and perjury) against
respondent Estrada.3
At the trial, the People presented testimonial and documentary evidence to prove the
allegations of the Informations for plunder, illegal use of alias, and perjury. The Peoples
evidence for the illegal alias charge, as summarized by the Sandiganbayan, consisted of:
A. The testimonies of Philippine Commercial and Industrial Bank (PCIB) officers Clarissa G.
Ocampo (Ocampo) and Atty. Manuel Curato (Curato) who commonly declared that on February
4, 2000, Estrada opened a numbered trust account (Trust Account C-163) with PCIB and signed
as "Jose Velarde" in the account opening documents; both Ocampo and Curato also testified
that Aprodicio Lacquian and Fernando Chua were present on that occasion;
B. (1) The testimony of PCIB-Greenhills Branch Manager Teresa Barcelan, who declared that a
certain Baby Ortaliza (Ortaliza) transacted several times with her; that Ortaliza deposited several
checks in PCIB Savings Account No. 0160-62502-5 under the account name "Jose Velarde" on
the following dates (as evidenced by deposit receipts duly marked in evidence):
a. 20 October 1999 (Exh. "MMMMM")
b. 8 November 1999 (Exh. "LLLLL")
c. 22 November 1999 (Exh. "NNNNN")
d. 24 November 1999 (Exh. "OOOOO")
e. 25 November 1999 (Exh. "PPPPP")
f. 20 December 1999 (Exh. "QQQQQ")
g. 21 December 1999 (Exh. "RRRRR")
h. 29 December 1999 (Exh. "SSSSS")
i. 4 January 2000 (Exh. "TTTTT")
309
j. 10 May 2000 (Exh. "UUUUU")
k. 6 June 2000 (Exh. "VVVVV")
l. 25 July 2000 (Exh. "WWWWW")
(2) Documents duly identified by witnesses showing that Lucena Ortaliza was employed in the
Office of the Vice President and, later on, in the Office of the President when Estrada occupied
these positions and when deposits were made to the Jose Velarde Savings Account No. 0160-
62502-5.
The People filed its Formal Offer of Exhibits in the consolidated cases, which the Sandiganbayan
admitted into evidence in a Resolution dated October 13, 2003.4 The accused separately moved
to reconsider the Sandiganbayan Resolution;5 the People, on the other hand, filed its
Consolidated Comment/Opposition to the motions.6 The Sandiganbayan denied the motions in
its Resolution dated November 17, 2003.7
After the People rested in all three cases, the defense moved to be allowed to file a demurrer
to evidence in these cases.8 In its Joint Resolution dated March 10, 2004,9 the Sandiganbayan
only granted the defense leave to file demurrers in Crim. Case Nos. 26565 (illegal use of alias)
and 26905 (perjury).
Estrada filed separate Demurrers to Evidence for Crim. Case Nos. 26565 and 26905.10 His
demurrer to evidence for Crim. Case No. 26565 (illegal use of alias) was anchored on the
following grounds11:
1. Of the thirty-five (35) witnesses presented by the prosecution, only two (2) witnesses, Ms.
Clarissa Ocampo and Atty. Manuel Curato, testified that on one occasion (4 February 2000), they
saw movant use the name "Jose Velarde";
2. The use of numbered accounts and the like was legal and was prohibited only in late 2001 as
can be gleaned from Bangko Sentral Circular No. 302, series of 2001, dated 11 October 2001;
3. There is no proof of public and habitual use of alias as the documents offered by the
prosecution are banking documents which, by their nature, are confidential and cannot be
revealed without following proper procedures; and
4. The use of alias is absorbed in plunder.
The People opposed the demurrers through a Consolidated Opposition that presented the
following arguments:12
1. That the use of fictitious names in bank transaction was not expressly prohibited until BSP No.
302 is of no moment considering that as early as Commonwealth Act No. 142, the use of alias
was already prohibited. Movant is being prosecuted for violation of C.A. No. 142 and not BSP
Circular No. 302;
2. Movants reliance on Ursua vs. Court of Appeals (256 SCRA 147 [1996]) is misplaced;
3. Assuming arguendo that C.A. No. 142, as amended, requires publication of the alias and the
habitual use thereof, the prosecution has presented more than sufficient evidence in this regard
to convict movant for illegal use of alias; and
4. Contrary to the submission of movant, the instant case of illegal use of alias is not absorbed
in plunder.
Estrada replied to the Consolidated Opposition through a Consolidated Reply Opposition.
THE ASSAILED SANDIGANBAYANS RULING
The Sandiganbayan issued on July 12, 2004 the Resolution now assailed in this petition. The
salient points of the assailed resolution are:
First the coverage of Estradas indictment. The Sandiganbayan found that the only relevant
evidence for the indictment are those relating to what is described in the Information i.e., the
testimonies and documents on the opening of Trust Account C-163 on February 4, 2000. The
Sandiganbayan reasoned out that the use of the disjunctive "or" between "on or about 04
February 2000" and "sometime prior or subsequent thereto" means that the act/s allegedly
committed on February 4, 2000 could have actually taken place prior to or subsequent thereto;
the use of the conjunctive was simply the prosecutions procedural tool to guard against any
variance between the date stated in the Information and that proved during the trial in a
situation in which time was not a material ingredient of the offense; it does not mean and cannot
be read as a roving commission that includes acts and/or events separate and distinct from
those that took place on the single date "on or about 04 February 2000 or sometime prior or
subsequent thereto." The Sandiganbayan ruled that the use of the disjunctive "or" prevented it
from interpreting the Information any other way.
Second the Peoples failure to present evidence that proved Estradas commission of the
offense. The Sandiganbayan found that the People failed to present evidence that Estrada
310
committed the crime punished under Commonwealth Act No. 142, as amended by Republic Act
(R.A.) No. 6085 (CA 142), as interpreted by the Supreme Court in Ursua v. Court of Appeals.13 It
ruled that there is an illegal use of alias within the context of CA 142 only if the use of the alias
is public and habitual. In Estradas case, the Sandiganbayan noted, the application of the
principles was not as simple because of the complications resulting from the nature of the
transaction involved the alias was used in connection with the opening of a numbered trust
account made during the effectivity of R.A. No. 1405, as amended,14 and prior to the enactment
of Republic R.A. No. 9160.15
Estrada did not publicly use the alias "Jose Velarde":
a. Estradas use of the alias "Jose Velarde" in his dealings with Dichavez and Ortaliza after
February 4, 2000 is not relevant in light of the conclusion that the acts imputed to Estrada under
the Information were the act/s committed on February 4, 2000 only. Additionally, the phrase,
"Estrada did represent himself as Jose Velarde in several transactions," standing alone,
violates Estradas right to be informed of the nature and the cause of the accusation, because it
is very general and vague. This phrase is qualified and explained by the succeeding phrase "and
use and employ the said alias Jose Velarde" which "is neither his registered name at birth nor
his baptismal name, in signing documents with Equitable PCI Bank and/or other corporate
entities." Thus, Estradas representations before persons other than those mentioned in the
Information are immaterial; Ortaliza and Dichavez do not fall within the "Equitable PCI Bank
and/or other corporate entities" specified in the Information. Estradas representations with
Ortaliza and Dichavez are not therefore covered by the indictment.
b. The Sandiganbayan rejected the application of the principle in the law of libel that mere
communication to a third person is publicity; it reasoned out that that the definition of publicity
is not limited to the way it is defined under the law on libel; additionally, the application of the
libel law definition is onerous to the accused and is precluded by the ruling in Ursua that CA No.
142, as a penal statute, should be construed strictly against the State and favorably for the
accused. It ruled that the definition under the law on libel, even if it applies, considers a
communication to a third person covered by the privileged communication rule to be non-
actionable. Estradas use of the alias in front of Ocampo and Curato is one such privileged
communication under R.A. No. 1405, as amended. The Sandiganbayan said:
Movants act of signing "Jose Velarde" in bank documents being absolutely confidential, the
witnessing thereof by bank officers who were likewise sworn to secrecy by the same law cannot
be considered as public as to fall within the ambit of CA 142 as amended. On account of the
absolute confidentiality of the transaction, it cannot be said that movant intended to be known
by this name in addition to his real name. Confidentiality and secrecy negate publicity. Ursua
instructs:
Hence, the use of a fictitious name or a different name belonging to another person in a single
instance without any sign or indication that the user intends to be known by this name in
addition to his real name from that day forth does not fall within the prohibition in C.A. No. 142
as amended.
c. The Sandiganbayan further found that the intention not to be publicly known by the name
"Jose Velarde" is shown by the nature of a numbered account a perfectly valid banking
transaction at the time Trust Account C-163 was opened. The opening, too, of a numbered trust
account, the Sandiganbayan further ruled, did not impose on Estrada the obligation to disclose
his real identity the obligation R.A. No. 6713 imposes is to file under oath a statement of assets
and liabilities.16 Reading CA No. 142, R.A. No. 1405 and R.A. No. 6713 together, Estrada had the
absolute obligation to disclose his assets including the amount of his bank deposits, but he was
under no obligation at all to disclose the other particulars of the bank account (such as the name
he used to open it).
Third the effect of the enactment of R.A. No. 9160.17 The Sandiganbayan said that the
absolute prohibition in R.A. No. 9160 against the use of anonymous accounts, accounts under
fictitious names, and all other similar accounts, is a legislative acknowledgment that a gaping
hole previously existed in our laws that allowed depositors to hide their true identities. The
Sandiganbayan noted that the prohibition was lifted from Bangko Sentral ng Pilipinas (BSP)
Circular No. 251 dated July 7, 2000 another confirmation that the opening of a numbered trust
account was perfectly legal when it was opened on February 4, 2000.
The Sandiganbayan ruled that the provisions of CA No. 142, as interpreted in Ursua, must
necessarily be harmonized with the provisions of R.A. No.1405 and R.A. No. 9160 under the
principle that every statute should be construed in a way that will harmonize it with existing
laws. A reasonable scrutiny, the Sandiganbayan said, of all these laws in relation to the present
case, led it to conclude that the use of an alias within the context of a bank transaction
(specifically, the opening of a numbered account made before bank officers) is protected by the
secrecy provisions of R.A. No. 1405, and is thus outside the coverage of CA No. 142 until the
passage into law of R.A. No. 9160.
THE PETITION
The People filed this petition raising the following issues:
1. Whether the court a quo gravely erred and abused its discretion in dismissing Crim. Case No.
26565 and in holding that the use by respondent Joseph Estrada of his alias "Jose Velarde" was
311
not public despite the presence of Messrs. Aprodicio Laquian and Fernando Chua on 4 February
2000;
2. Whether the court a quo gravely erred and abused its discretion in dismissing Crim. Case No.
26565 and in holding that the use by respondent Joseph Estrada of his alias "Jose Velarde" was
allowable under banking rules, despite the clear prohibition under Commonwealth Act No. 142;
3. Whether the court a quo gravely erred and abused its discretion in dismissing Crim. Case No.
26565 and in applying R.A. No. 1405 as an exception to the illegal use of alias punishable under
Commonwealth Act No. 142;
4. Whether the alleged harmonization and application made by the court a quo of R.A. No.1405
and Commonwealth Act No. 142 were proper;
5. Whether the court a quo gravely erred and abused its discretion in limiting the coverage of
the amended Information in Crim. Case No. 26565 to the use of the alias "Jose Velarde" by
respondent Joseph Estrada on February 4, 2000;
6. Whether the court a quo gravely erred and abused its discretion in departing from its earlier
final finding on the non-applicability of Ursua v. Court of Appeals and forcing its application to
the instant case.
THE COURTS RULING
The petition has no merit.
The Law on Illegal Use of Alias and the Ursua Ruling
Sections 1 and 2 of CA No. 142, as amended, read:
Section 1. Except as a pseudonym solely for literary, cinema, television, radio or other
entertainment purposes and in athletic events where the use of pseudonym is a normally
accepted practice, no person shall use any name different from the one with which he was
registered at birth in the office of the local civil registry or with which he was baptized for the
first time, or in case of an alien, with which he was registered in the bureau of immigration upon
entry; or such substitute name as may have been authorized by a competent court: Provided,
That persons whose births have not been registered in any local civil registry and who have not
been baptized, have one year from the approval of this act within which to register their names
in the civil registry of their residence. The name shall comprise the patronymic name and one or
two surnames.
Section 2. Any person desiring to use an alias shall apply for authority therefor in proceedings
like those legally provided to obtain judicial authority for a change of name and no person shall
be allowed to secure such judicial authority for more than one alias. The petition for an alias
shall set forth the person's baptismal and family name and the name recorded in the civil
registry, if different, his immigrant's name, if an alien, and his pseudonym, if he has such names
other than his original or real name, specifying the reason or reasons for the desired alias. The
judicial authority for the use of alias, the Christian name and the alien immigrant's name shall
be recorded in the proper local civil registry, and no person shall use any name or names other
than his original or real name unless the same is or are duly recorded in the proper local civil
registry.
How this law is violated has been answered by the Ursua definition of an alias "a name or
names used by a person or intended to be used by him publicly and habitually usually in business
transactions in addition to his real name by which he is registered at birth or baptized the first
time or substitute name authorized by a competent authority." There must be, in the words of
Ursua, a "sign or indication that the user intends to be known by this name (the alias) in addition
to his real name from that day forth [for the use of alias to] fall within the prohibition
contained in C.A. No. 142 as amended."18
Ursua further relates the historical background and rationale that led to the enactment of CA
No. 142, as follows:
The enactment of C.A. No. 142 was made primarily to curb the common practice among the
Chinese of adopting scores of different names and aliases which created tremendous confusion
in the field of trade. Such a practice almost bordered on the crime of using fictitious names
which for obvious reasons could not be successfully maintained against the Chinese who, rightly
or wrongly, claimed they possessed a thousand and one names. C.A. No. 142 thus penalized the
act of using an alias name, unless such alias was duly authorized by proper judicial proceedings
and recorded in the civil register.19
Following the doctrine of stare decisis,20 we are guided by the Ursua ruling on how the crime
punished under CA No. 142 may be committed. Close adherence to this ruling, in other words,
is unavoidable in the application of and the determination of criminal liability under CA No. 142.
Among the many grounds the People invokes to avoid the application of the Ursua ruling
proceeds from Estradas position in the government; at the time of the commission of the
offense, he was the President of the Republic who is required by law to disclose his true name.
We do not find this argument sufficient to justify a distinction between a man on the street, on
one hand, and the President of the Republic, on the other, for purposes of applying CA No. 142.
312
In the first place, the law does not make any distinction, expressly or impliedly, that would justify
a differential treatment. CA No. 142 as applied to Estrada, in fact allows him to use his cinema
or screen name of Joseph Estrada, which name he has used even when he was already the
President of the Philippines. Even the petitioner has acquiesced to the use of the screen name
of the accused, as shown by the title of the present petition. Additionally, any distinction we
make based on the Peoples claim unduly prejudices Estrada; this is proscribed by the Ursua
dictum that CA No. 142, as a penal statute, should be construed strictly against the State and in
favor of the accused.21 The mode of violating CA No. 142 is therefore the same whoever the
accused may be.
The People also calls our attention to an earlier Sandiganbayan ruling (Resolution dated
February 6, 2002) denying Estradas motion to quash the Information. This earlier Resolution
effectively rejected the application of Ursua under the following tenor:
The use of the term "alias" in the Amended Information in itself serves to bring this case outside
the ambit of the ruling in the case of Ursua v. Court of Appeals (256 SCRA 147 [1996]), on which
the accused heavily relies in his motion to quash. The term "alias" means "otherwise known as"
(Webster Third New International Dictionary, 1993 ed., p. 53). The charge of using an "alias"
logically implies that another name has been used publicly and habitually. Otherwise, he will not
be known by such name. In any case, the amended information adverts to "several transactions"
and signing of documents with the Equitable PCI Bank and/or other corporate entities where
the above-mentioned alias was allegedly employed by the accused.
The facts alleged in the information are distinctly different from facts established in the Ursua
case where another name was used by the accused in a single instance without any sign or
indication that that [sic] he intended to be known from that day by this name in addition to his
real name.22
The People argues that the Sandiganbayan gravely abused its discretion in applying Ursua
notwithstanding this earlier final ruling on its non-applicability a ruling that binds the parties
in the present case. The People thus claims that the Sandiganbayan erred to the point of gravely
abusing its discretion when it resurrected the application of Ursua, resulting in the reversal of
its earlier final ruling.
We find no merit in this argument for two reasons. First, the cited Sandiganbayan resolution is
a mere interlocutory order a ruling denying a motion to quash23 that cannot be given the
attributes of finality and immutability that are generally accorded to judgments or orders that
finally dispose of the whole, of or particular matters in, a case.24 The Sandiganbayan resolution
is a mere interlocutory order because its effects would only be provisional in character, and
would still require the issuing court to undertake substantial proceedings in order to put the
controversy to rest.25 It is basic remedial law that an interlocutory order is always under the
control of the court and may be modified or rescinded upon sufficient grounds shown at any
time before final judgment.26 Perez v. Court of Appeals,27 albeit a civil case, instructively
teaches that an interlocutory order carries no res adjudicata effects. Says Perez:
The Decision in CA-G.R. No. 10415 having resolved only an interlocutory matter, the principle of
res judicata cannot be applied in this case. There can be no res judicata where the previous order
in question was not an order or judgment determinative of an issue of fact pending before the
court but was only an interlocutory order because it required the parties to perform certain acts
for final adjudication. In this case, the lifting of the restraining order paved the way for the
possession of the fishpond on the part of petitioners and/or their representatives pending the
resolution of the main action for injunction. In other words, the main issue of whether or not
private respondent may be considered a sublessee or a transferee of the lease entitled to
possess the fishpond under the circumstances of the case had yet to be resolved when the
restraining order was lifted.28
Second, in the earlier motion to quash, the Sandiganbayan solely looked at the allegations of
the Information to determine the sufficiency of these allegations and did not consider any
evidence aliunde. This is far different from the present demurrer to evidence where the
Sandiganbayan had a fuller view of the prosecutions case, and was faced with the issue of
whether the prosecutions evidence was sufficient to prove the allegations of the Information.
Under these differing views, the Sandiganbayan may arrive at a different conclusion on the
application of Ursua, the leading case in the application of CA 142, and the change in ruling is
not per se indicative of grave abuse of discretion. That there is no error of law is strengthened
by our consideration of the Sandiganbayan ruling on the application of Ursua.
In an exercise of caution given Ursuas jurisprudential binding effect, the People also argues in
its petition that Estradas case is different from Ursuas for the following reasons: (1) respondent
Estrada used and intended to continually use the alias "Jose Velarde" in addition to the name
"Joseph Estrada"; (2) Estradas use of the alias was not isolated or limited to a single transaction;
and (3) the use of the alias "Jose Velarde" was designed to cause and did cause "confusion and
fraud in business transactions" which the anti-alias law and its related statutes seek to prevent.
The People also argues that the evidence it presented more than satisfied the requirements of
CA No. 142, as amended, and Ursua, as it was also shown or established that Estradas use of
the alias was public.
In light of our above conclusions and based on the parties expressed positions, we shall now
examine within the Ursua framework the assailed Sandiganbayan Resolution granting the
demurrer to evidence. The prosecution has the burden of proof to show that the evidence it
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presented with the Sandiganbayan satisfied the Ursua requirements, particularly on the matter
of publicity and habituality in the use of an alias.
What is the coverage of the indictment?
The People argues that the Sandiganbayan gravely erred and abused its discretion in limiting the
coverage of the amended Information in Crim. Case No. 26565 to Estradas use of the alias "Jose
Velarde" on February 4, 2000. It posits that there was a main transaction one that took place
on February 4, 2000 but there were other transactions covered by the phrase "prior to or
subsequent thereto; the Information specifically referred to "several transactions" "with
Equitable PCI Bank and/or other corporate entities." To the People, the restrictive finding that
the phrase "prior to or subsequent thereto" is absorbed by the phrase "on or about 04 February
2000" drastically amends the succeeding main allegations on the constitutive criminal acts by
removing the plurality of both the transactions involved and the documents signed with various
entities; there is the undeniable essential relationship between the allegations of the multiplicity
of transactions, on one hand, and the additional antecedent of "prior to or subsequent thereto,"
on the other. It argues that the Sandiganbayan reduced the phrase "prior to or subsequent
thereto" into a useless appendage, providing Estrada with a convenient and totally unwarranted
escape route.
The People further argues that the allegation of time is the least exacting in satisfying the
constitutional requirement that the accused has to be informed of the accusation against him.
Section 6 of Rule 110 of the Revised Rules of Court provides that an allegation of the
approximate date of the commission of the offense will suffice, while Section 11 of the same
Rule provides that it is not necessary to state in the complaint or information the precise date
the offense was committed except when it is a material ingredient of the crime. This liberality
allegedly shaped the time-tested rule that when the "time" given in the complaint is not of the
essence of the offense, the time of the commission of the offense does not need to be proven
as alleged, and that the complaint will be sustained if the proof shows that the offense was
committed at any time within the period of the statute of limitations and before the
commencement of the action (citing People v. Bugayong [299 SCRA 528, 537] that in turn cited
US v. Smith [3 Phil. 20, 22]). Since allegations of date of the commission of an offense are liberally
interpreted, the People posits that the Sandiganbayan gravely abused its discretion in
disregarding the additional clause "prior to or subsequent thereto"; under the liberality
principle, the allegations of the acts constitutive of the offense finally determine the sufficiency
of the allegations of time. The People thus claims that no surprise could have taken place that
would prevent Estrada from properly defending himself; the information fully notified him that
he was being accused of using the alias Jose Velarde in more than just one instance.
We see no merit in these arguments.
At its core, the issue is constitutional in nature the right of Estrada to be informed of the nature
and cause of the accusation against him. Under the provisions of the Rules of Court
implementing this constitutional right, a complaint or information is sufficient if it states the
name of the accused; the designation of the offense given by the statute; the acts or omissions
complained of as constituting the offense in the name of the offended party; the approximate
date of the commission of the offense; and the place where the offense was committed.29 As
to the cause of accusation, the acts or omissions complained of as constituting the offense and
the qualifying and aggravating circumstances must be stated in ordinary and concise language
and not necessarily in the language used in the statute, but in terms sufficient to enable a person
of common understanding to know the offense charged and the qualifying and aggravating
circumstances, and for the court to pronounce judgment.30 The date of the commission of the
offense need not be precisely stated in the complaint or information except when the precise
date is a material ingredient of the offense. The offense may be alleged to have been committed
on a date as near as possible to the actual date of its commission.31
The information must at all times embody the essential elements of the crime charged by setting
forth the facts and circumstances that bear on the culpability and liability of the accused so that
he can properly prepare for and undertake his defense.32 In short, the allegations in the
complaint or information, as written, must fully inform or acquaint the accused the primary
reader of and the party directly affected by the complaint or information of the charge/s laid.
The heretofore cited Information states that " on or about 04 February 2000, or sometime
prior or subsequent thereto, in the City of Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused [did] willfully, unlawfully and criminally
REPRESENT HIMSELF AS JOSE VELARDE IN SEVERAL TRANSACTIONS AND use and employ the
SAID alias "Jose Velarde" which IS neither his registered name at birth nor his baptismal name,
in signing documents with Equitable PCI Bank and/or other corporate entities."
We fully agree with the disputed Sandiganbayans reading of the Information, as this was how
the accused might have similarly read and understood the allegations in the Information and,
on this basis, prepared his defense. Broken down into its component parts, the allegation of
time in the Information plainly states that (1) ON February 4, 2000; (2) OR before February 4,
2000; (3) OR sometime prior or subsequent to February 4, 2000, in the City of Manila, Estrada
represented himself as "Jose Velarde" in several transactions in signing documents with
Equitable PCI Bank and/or other corporate entities.
Under this analysis, the several transactions involving the signing of documents with Equitable
PCI Bank and/or other corporate entities all had their reference to February 4, 2000; they were
all made on or about or prior or subsequent to that date, thus plainly implying that all these
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transactions took place only on February 4, 2000 or on another single date sometime before or
after February 4, 2000. To be sure, the Information could have simply said "on or about February
4, 2000" to capture all the alternative approximate dates, so that the phrase "sometime prior or
subsequent thereto" would effectively be a surplusage that has no meaning separately from the
"on or about" already expressed. This consequent uselessness of the "prior or subsequent
thereto" phrase cannot be denied, but it is a direct and necessary consequence of the use of the
"OR" between the two phrases and the "THERETO" that referred back to February 4, 2000 in the
second phrase. Of course, the reading would have been very different (and would have been
clearly in accord with the Peoples present interpretation) had the Information simply used
"AND" instead of "OR" to separate the phrases; the intent to refer to various transactions
occurring on various dates and occasions all proximate to February 4, 2000 could not be
disputed. Unfortunately for the People, the imprecision in the use of "OR" is the reality the case
has to live with. To act contrary to this reality would violate Estradas right to be informed of the
nature and cause of accusation against him; the multiple transactions on several separate days
that the People claims would result in surprise and denial of an opportunity to prepare for
Estrada, who has a right to rely on the single day mentioned in the Information.
Separately from the constitutional dimension of the allegation of time in the Information,
another issue that the allegation of time and our above conclusion raise relates to what act or
acts, constituting a violation of the offense charged, were actually alleged in the
Information.1avvphi1
The conclusion we arrived at necessarily impacts on the Peoples case, as it deals a fatal blow on
the Peoples claim that Estrada habitually used the Jose Velarde alias. For, to our mind, the
repeated use of an alias within a single day cannot be deemed "habitual," as it does not amount
to a customary practice or use. This reason alone dictates the dismissal of the petition under CA
No. 142 and the terms of Ursua.
The issues of publicity, numbered accounts, and
the application of CA No. 142, R.A. No. 1405,
and R.A. No. 9160.
We shall jointly discuss these interrelated issues.
The People claims that even on the assumption that Ocampo and Curato are bank officers sworn
to secrecy under the law, the presence of two other persons who are not bank officers
Aprodicio Laquian and Fernando Chua when Estradas signed the bank documents as "Jose
Velarde" amounted to a "public" use of an alias that violates CA No. 142.
On the issue of numbered accounts, the People argues that to premise the validity of Estradas
prosecution for violation of CA No. 142 on a mere banking practice is gravely erroneous,
improper, and constitutes grave abuse of discretion; no banking law provision allowing the use
of aliases in the opening of bank accounts existed; at most, it was allowed by mere convention
or industry practice, but not by a statute enacted by the legislature. Additionally, that Estradas
prosecution was supposedly based on BSP Circular No. 302 dated October 11, 2001 is wrong and
misleading, as Estrada stands charged with violation of CA No. 142, penalized since 1936, and
not with a violation of a mere BSP Circular. That the use of alias in bank transactions prior to BSP
Circular No. 302 is allowed is inconsequential because as early as CA No. 142, the use of an alias
(except for certain purposes which do not include banking) was already prohibited. Nothing in
CA No. 142 exempted the use of aliases in banking transactions, since the law did not distinguish
or limit its application; it was therefore grave error for the Sandiganbayan to have done so. Lastly
on this point, bank regulations being mere issuances cannot amend, modify or prevail over the
effective, subsisting and enforceable provision of CA No. 142.
On the issue of the applicability of R.A. No. 1405 and its relationship with CA No. 142, that since
nothing in CA No. 142 excuses the use of an alias, the Sandiganbayan gravely abused its
discretion when it ruled that R.A. No. 1405 is an exception to CA No. 142s coverage.
Harmonization of laws, the People posits, is allowed only if the laws intended to be harmonized
refer to the same subject matter, or are at least related with one another. The three laws which
the Sandiganbayan tried to harmonize are not remotely related to one another; they each deal
with a different subject matter, prohibits a different act, governs a different conduct, and covers
a different class of persons,33 and there was no need to force their application to one another.
Harmonization of laws, the People adds, presupposes the existence of conflict or incongruence
between or among the provisions of various laws, a situation not obtaining in the present case.
The People posits, too, that R.A. No. 1405 does not apply to trust transactions, such as Trust
Account No. C-163, as it applies only to traditional deposits (simple loans). A trust account,
according to the People, may not be considered a deposit because it does not create the juridical
relation of creditor and debtor; trust and deposit operations are treated separately and are
different in legal contemplation; trust operation is separate and distinct from banking and
requires a grant of separate authority, and trust funds are not covered by deposit insurance
under the Philippine Deposit Insurance Corporation law (R.A. No. 3591, as amended).
The People further argues that the Sandiganbayans conclusion that the transaction or
communication was privileged in nature was erroneous a congruent interpretation of CA No.
142 and R.A. No. 1405 shows that a person who signs in a public or private transaction a name
or alias, other than his original name or the alias he is authorized to use, shall be held liable for
violation of CA No. 142, while the bank employees are bound by the confidentiality of bank
transactions except in the circumstances enumerated in R.A. No. 1405. At most, the People
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argues, the prohibition in R.A. No. 1405 covers bank employees and officers only, and not
Estrada; the law does not prohibit Estrada from disclosing and making public his use of an alias
to other people, including Ocampo and Curato, as he did when he made a public exhibit and use
of the alias before Messrs. Lacquian and Chua.
Finally, the People argues that the Sandiganbayan ruling that the use of an alias before bank
officers does not violate CA No. 142 effectively encourages the commission of wrongdoing and
the concealment of ill-gotten wealth under pseudonyms; it sustains an anomalous and
prejudicial policy that uses the law to silence bank officials and employees from reporting the
commission of crimes. The People contends that the law R.A. No. 1405 was not intended by
the Legislature to be used as a subterfuge or camouflage for the commission of crimes and
cannot be so interpreted; the law can only be interpreted, understood and applied so that right
and justice would prevail.
We see no merit in these arguments.
We agree, albeit for a different reason, with the Sandiganbayan position that the rule in the law
of libel that mere communication to a third person is publicity does not apply to violations
of CA No. 142. Our close reading of Ursua particularly, the requirement that there be intention
by the user to be culpable and the historical reasons we cited above tells us that the required
publicity in the use of alias is more than mere communication to a third person; the use of the
alias, to be considered public, must be made openly, or in an open manner or place, or to cause
it to become generally known. In order to be held liable for a violation of CA No. 142, the user
of the alias must have held himself out as a person who shall publicly be known under that other
name. In other words, the intent to publicly use the alias must be manifest.
To our mind, the presence of Lacquian and Chua when Estrada signed as Jose Velarde and
opened Trust Account No. C-163 does not necessarily indicate his intention to be publicly known
henceforth as Jose Velarde. In relation to Estrada, Lacquian and Chua were not part of the public
who had no access to Estradas privacy and to the confidential matters that transpired in
Malacaan where he sat as President; Lacquian was the Chief of Staff with whom he shared
matters of the highest and strictest confidence, while Chua was a lawyer-friend bound by his
oath of office and ties of friendship to keep and maintain the privacy and secrecy of his affairs.
Thus, Estrada could not be said to have intended his signing as Jose Velarde to be for public
consumption by the fact alone that Lacquian and Chua were also inside the room at that time.
The same holds true for Estradas alleged representations with Ortaliza and Dichavez, assuming
the evidence for these representations to be admissible. All of Estradas representations to
these people were made in privacy and in secrecy, with no iota of intention of publicity.
The nature, too, of the transaction on which the indictment rests, affords Estrada a reasonable
expectation of privacy, as the alleged criminal act related to the opening of a trust account a
transaction that R.A. No. 1405 considers absolutely confidential in nature.34 We previously
rejected, in Ejercito v. Sandiganbayan,35 the Peoples nitpicking argument on the alleged
dichotomy between bank deposits and trust transactions, when we said:
The contention that trust accounts are not covered by the term "deposits," as used in R.A. 1405,
by the mere fact that they do not entail a creditor-debtor relationship between the trustor and
the bank, does not lie. An examination of the law shows that the term "deposits" used therein
is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor
relationship between the depositor and the bank.
The policy behind the law is laid down in Section 1:
SECTION 1. It is hereby declared to be the policy of the Government to give encouragement to
the people to deposit their money in banking institutions and to discourage private hoarding so
that the same may be properly utilized by banks in authorized loans to assist in the economic
development of the country. (Underscoring supplied)
If the money deposited under an account may be used by bank for authorized loans to third
persons, then such account, regardless of whether it creates a creditor-debtor relationship
between the depositor and the bank, falls under the category of accounts which the law
precisely seeks to protect for the purpose of boosting the economic development of the country.
Trust Account No. 858 is, without doubt, one such account. The Trust Agreement between
petitioner and Urban Bank provides that the trust account covers "deposit, placement or
investment of funds" by Urban Bank for and in behalf of petitioner. The money deposited under
Trust Account No. 858, was, therefore, intended not merely to remain with the bank but to be
invested by it elsewhere. To hold that this type of account is not protected by R.A. 1405 would
encourage private hoarding of funds that could otherwise be invested by bank in other ventures,
contrary to the policy behind the law.
Section 2 of the same law in fact even more clearly shows that the term "deposits" was intended
to be understood broadly:
SECTION 2. All deposits of whatever nature with bank or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment,
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or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the litigation.
(Emphasis and underscoring supplied)1avvphi1
The phrase "of whatever nature" proscribes any restrictive interpretation of "deposits."
Moreover, it is clear from the immediately quoted provision that, generally, the law applies not
only to money which is deposited but also to those which are invested. This further shows that
the law was not intended to apply only to "deposits" in the strict sense of the word.lawphil.net
Otherwise, there would have been no need to add the phrase "or invested.
Clearly, therefore, R.A. 1405 is broad enough to cover Trust Account No. 858.36
We have consistently ruled that bank deposits under R.A. No. 1405 (the Secrecy of Bank Deposits
Law) are statutorily protected or recognized zones of privacy.37 Given the private nature of
Estradas act of signing the documents as "Jose Velarde" related to the opening of the trust
account, the People cannot claim that there was already a public use of alias when Ocampo and
Curato witnessed the signing. We need not even consider here the impact of the obligations
imposed by R.A. No.1405 on the bank officers; what is essentially significant is the privacy
situation that is necessarily implied in these kinds of transactions. This statutorily guaranteed
privacy and secrecy effectively negate a conclusion that the transaction was done publicly or
with the intent to use the alias publicly.
in relation to the indictment against Estrada, cannot be a source or an influencing factor in his
indictment.
In finding the absence of the requisite publicity, we simply looked at the totality of the
circumstances obtaining in Estradas use of the alias "Jose Velarde" vis--vis the Ursua requisites.
We do not decide here whether Estradas use of an alias when he occupied the highest executive
position in the land was valid and legal; we simply determined, as the Sandiganbayan did,
whether he may be made liable for the offense charged based on the evidence the People
presented. As with any other accused, his guilt must be based on the evidence and proof beyond
reasonable doubt that a finding of criminal liability requires. If the People fails to discharge this
burden, as they did fail in this case, the rule of law requires that we so declare. We do so now in
this review and accordingly find no reversible error of law in the assailed Sandiganbayan ruling.
WHEREFORE, premises considered, we DENY the petition for lack of merit.
SO ORDERED.

The enactment of R.A. No.9160, on the other hand, is a significant development only because it
clearly manifests that prior to its enactment, numbered accounts or anonymous accounts were
permitted banking transactions, whether they be allowed by law or by a mere banking
regulation. To be sure, an indictment against Estrada using this relatively recent law cannot be
maintained without violating the constitutional prohibition on the enactment and use of ex post
facto laws.38

We hasten to add that this holistic application and interpretation of these various laws is not an
attempt to harmonize these laws. A finding of commission of the offense punished under CA
No. 142 must necessarily rest on the evidence of the requisites for culpability, as amplified in
Ursua. The application of R.A. No. 1405 is significant only because Estradas use of the alias was
pursuant to a transaction that the law considers private or, at the very least, where the law
guarantees a reasonable expectation of privacy to the parties to the transactions; it is at this
point that R.A. No. 1405 tangentially interfaces with an indictment under CA 142. In this light,
there is no actual frontal clash between CA No. 142 and R.A. No. 1405 that requires
harmonization. Each operates within its own sphere, but must necessarily be read together
when these spheres interface with one another. Finally, R.A. No. 9160, as a law of recent vintage

317