CIVIL LAW | C r e d i t T r a n s a c t i o n s
under the time deposit certificates Nos. 2308 and 2367
SECOND DIVISION
[G.R. No. 60705. June 28, 1989.]
INTEGRATED REALTY CORPORATION and RAUL L.
SANTOS, Petitioners, v. PHILIPPINE NATIONAL
BANK, OVERSEAS BANK OF MANILA and THE HON.
COURT OF APPEALS, Respondents.
[G.R. No. 60907. June 28, 1989.]
OVERSEAS BANK OF MANILA, Petitioner, v. COURT
OF APPEALS, INTEGRATED REALTY
CORPORATION, and RAUL L.
SANTOS, Respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NON-
PERFORMANCE OF OBLIGATIONS; LEGAL INTEREST
RECOVERABLE FROM DEMAND. — Legal interest, in the
nature of damages for non-compliance with an
obligation to pay a sum of money, is recoverable from
the date judicial or extrajudicial demand is made.
2. ID.; ID.; PARTY NOT PRIVY TO A CONTRACT, NOT
LIABLE. — We reject the proposition of IRC and Santos
that OBM should reimburse them the entire amount
they may be adjudged to pay PNB. It must be noted
that their liability to pay the various interests is an
offshoot of their failure to pay under the terms of the
two promissory notes executed in favor of PNB. OBM
was never a party to said promissory notes. There is,
therefore, no privity of contract between OBM and PNB
which will justify the imposition of the aforesaid
interests upon OBM whose liability should be strictly
confined to and within the provisions of the certificates
of time deposit involved in this case.
3. ID.; DAMAGES; PARTY IN BAD FAITH LIABLE
THERETO. — IRC and Santos are not without fault. They
likewise acted in bad faith when they refused to comply
with their obligations under the promissory notes, thus
incurring liability for all damages reasonably attributable
to the non-payment of said obligations.
DECISION
REGALADO, J.:
In these petitions for review on certiorari, Integrated
Realty Corporation and Raul Santos (G.R. No. 60705),
and Overseas Bank of Manila (G.R. No. 60907) appeal
from the decision of the Court of Appeals, 1 the decretal
portion of which states:chanrob les vi rtua l lawlib rary
"WHEREFORE, with the modification that appellee
Overseas Bank of Manila is ordered to pay to the
appellant Raul Santos the sum of P700,000.00 due
106 | P a g e #SJBL
with 6 1/2 (sic) interest per annum from date of issue
until fully paid, the appealed decision is affirmed in all
other respects."cralaw virtua1aw l ibra ry
In G.R. No. 60705, petitioners Integrated Realty
Corporation (hereafter, IRC) and Raul L. Santos
(hereafter, Santos) seek the dismissal of the complaint
filed by the Philippine National Bank (hereafter, PNB), or
in the event that they be held liable thereunder, to
revive and affirm that portion of the decision of the trial
court ordering Overseas Bank of Manila (hereafter,
OBM) to pay IRC and Santos whatever amounts the
latter will pay to PNB, with interest from the date of
payment. 2
On the other hand, in G.R. No. 60907, petitioner OBM
challenges the decision of respondent court insofar as it
holds OBM liable for interest on the time deposit with it
of Santos corresponding to the period of its closure by
order of the Central Bank. 3
In its assailed decision, the respondent Court of
Appeals, quoting from the decision of the lower court, 4
narrated the antecedents this case in this wise: jgc:chan roble s.com.p h
"The facts of this case are not seriously disputed by any
of the parties. They are set forth in the decision of the
trial court as follows:
chan rob1e s virtual 1aw lib rary
Under date 11 January 1967 defendant Raul L. Santos
made a time deposit with defendant OBM in the amount
of P500,000.00. (Exhibit-10 OBM) and was issued a
Certificate of Time Deposit No. 2308 (Exhibit 1-Santos,
Exhibit D). Under date 6 February 1967 defendant Raul
L. Santos also made a time deposit with defendant OBM
in the amount of P200,000.00 (Exhibit 11-OBM) and
was issued certificate of Time Deposit No. 2367 (Exhibit
2-Santos, Exhibit E).
Under date 9 February 1967 defendant IRC, thru its
President — defendant Raul L. Santos, applied for a loan
and/or credit line (Exhibit A) in the amount of
P700,000.00 with plaintiff bank. To secure the said loan,
defendant Raul L. Santos executed on August 11, 1967
a Deed of Assignment (Exhibit C) of the two time
deposits (Exhibits 1-Santos and 2-Santos, also Exhibits
D and E) in favor of plaintiff. Defendant OBM gave its
conformity to the assignment thru letter dated 11
August 1967 (Exhibit F). On the same date, defendant
IRC, thru its President Raul L. Santos, also executed a
Deed of Conformity to Loan Conditions (Exhibit G).
The defendant OBM, after the due dates of the time
deposit certificates, did not pay plaintiff PNB. Plaintiff
demanded payment from defendants IRC and Raul L.
Santos (Exhibit K) and from defendant OBM (Exhibit L).
Defendants IRC and Raul L. Santos replied that the
obligation (loan) of defendant IRC was deemed paid
with the irrevocable assignment of the time deposit
certificates (Exhibits 5-Santos, 6-Santos and 7-Santos).
"On April 6, 1969 (sic), * PNB filed a complaint to collect
from IRC and Santos the loan of P700,000.00 with
interest as well as attorney’s fees. It impleaded OBM as
a defendant to compel it to redeem and pay to it Santos’
time deposit certificates with interest, plus exemplary
and corrective damages, attorney’s fees, and costs.
"In their answer to the complaint, IRC and Santos
alleged that PNB has no cause of action against them
because their obligation to PNB was fully paid or
extinguished upon the ‘irrevocable’ assignment of the
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
time deposit certificates, and that they are not
answerable for the insolvency of OBM. They filed a
counterclaim for damages against PNB and a cross-
claim against OBM, alleging that OBM acted fraudulently
in refusing to pay the time deposit certificates to PNB
resulting in the filing of the suit against them by PNB,
and that, therefore, OBM should pay them whatever
amount they may be ordered by the court to pay PNB
with interest. They also asked that OBM be ordered to
pay them compensatory, moral, exemplary and
corrective damages.
"In its answer to the complaint, OBM denied knowledge
of the time deposit certificates because the alleged time
deposit of Santos ‘does not appear’ in its books of
account.
"Whereupon, IRC and Santos, with leave of court, filed a
third-party complaint against Emerito B. Ramos, Jr.,
president of OBM, and Rodolfo R. Sunico, treasurer of
said bank, who allegedly received the time deposits of
Santos and issued the certificates therefor.
"Answering the third-party complaint, Ramos and
Sunico alleged that IRC and Santos have no cause of
action against them because they received and signed
the time deposit certificates as officers of OBM, that the
time deposits are recorded in the subsidiary ledgers of
the bank and are ‘civil liabilities of the defendant OBM.’
"On November 18, 1970, OBM filed an amended or
supplemental answer to the complaint, acknowledging
the certificates of time deposit that it issued to Santos,
and admitting its failure to pay the same due to its
distressed financial situation. As affirmative defenses, it
alleged that by reason of its state of insolvency its
operations have been suspended by the Central Bank
since August 1, 1968; that the time deposits ceased to
earn interest from that date; that it may not give
preference to any depositor or creditor; and that
payment of the plaintiff’s claim is prohibited.
"On January 30, 1976, the lower court rendered
judgment for the plaintiff, the dispositive portion of
which reads as follows: chanro b1es vi rt ual 1aw li bra ry
‘WHEREFORE, judgment is hereby rendered, ordering:
1aw libra ry
1. The defendant Integrated Realty Corporation and
Raul L. Santos to pay the plaintiff, jointly and solidarily,
the total amount of P700,000.00 plus interest at the
rate of 9% per annum from maturity dates of the two
promissory notes on January 11 and February 6, 1968,
respectively (Exhibits M and I), plus 1-1/ 2% additional
interest effective February 28, 1968 and additional
penalty interest of 1% per annum of the said amount of
P700,000.00 from the time of maturity of said loan up
to the time the said amount of P700,000.00 is actually
paid to the plaintiff;
2. The defendants to pay 10% of the amount of
P700,000.00 as and for attorney’s fees;
3. The defendant Overseas Bank of Manila to pay cross
plaintiffs Integrated Realty Corporation and Raul L.
Santos whatever amounts the latter will pay to the
plaintiff with interest from date of payment;
4. The defendant Overseas Bank of Manila to pay cross
plaintiffs Integrated Realty Corporation and Raul L.
Santos the amount of P10,000.00 as and for attorney’s
fees;
107 | P a g e
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the
costs.
SO ORDERED.’" 5
IRC, Santos and OBM all appealed to the respondent
Court of Appeals. As stated in limine, on March 16, 1982
respondent court promulgated its appealed decision,
with a modification and the deletion of that portion of
the judgment of the trial court ordering OBM to pay IRC
and Santos whatever amounts they will pay to PNB with
interest from the date of payment.
Therein defendants-appellants, through separate
petitions, have brought the said decision to this Court
for review. cha nrob les vi rtua lawlib rary chan robles .com:cha nro bles.c om.ph
1. The first issue posed before Us for resolution is
whether the liability of IRC ,and Santos with PNB should
be deemed to have been paid by virtue of the deed of
assignment made by the former in favor of PNB, which
reads:jgc:chan roble s.com.p h
"KNOW ALL MEN BY THESE PRESENTS;
I, RAUL L. SANTOS, of legal age, Filipino, with residence
and postal address at 661 Richmond St., Mandaluyong,
Rizal for and in consideration of certain loans, overdrafts
and other credit accommodations granted or those that
may hereafter be granted to me/us by the PHILIPPINE
NATIONAL BANK, have assigned, transferred and
conveyed and by these presents, do hereby assign,
transfer and convey by way of security unto said
PHILIPPINE NATIONAL BANK its successors and assigns
the following Certificates of Time Deposit issued by the
OVERSEAS BANK OF MANILA, its CONFORMITY issued
on August 11, 1967, hereto enclosed as Annex ‘A’, in
favor of RAUL L. SANTOS and/or NORA S. SANTOS, in
the aggregate sum of SEVEN HUNDRED THOUSAND
PESOS ONLY (P700,000.00), Philippine Currency, . . .
x x x
cha nrob 1es vi rtua l
"It is also understood that the herein Assignor/s shall
remain liable for any outstanding balance of his/their
obligation if the Bank is unable to actually receive or
collect the above assigned sums, monies or properties
resulting from any agreements, orders or decisions of
the court or for any other cause whatsoever." 6
x x x
Respondent Court of Appeals did not consider the
aforesaid assignment as payment, thus: jgc:chanroble s.com.p h
"The contention of IRC and Santos that the irrevocable
assignment of the time deposit certificates to PNB
constituted ‘payment’ of their obligation to the latter is
not well taken.
‘Where a certificate of deposit in a bank, payable at a
future day, was handed over by a debtor to his creditor,
it was not payment, unless there was an express
agreement on the part of the creditor to receive it as
such, and the question whether there was or was not
such an agreement, was one of facts to be decided by
the jury.’ (Downey v. Hicks, 55 U.S. [14 How.] 240 L.
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
Ed. 404; See also Michie, Vol. 5B Banks and Banking, p.
200)." 7
We uphold respondent court on this score.
In Lopez v. Court of Appeals, Et Al., 8 petitioner Benito
Lopez obtained a loan for P20,000.00 from the
Prudential Bank and Trust Company. On the same day,
he executed a promissory note in favor of the bank and,
in addition, he executed a surety bond in which he, as
principal, and Philippine American General Insurance
Co., Inc. (Philamgen), as surety, bound themselves
jointly and severally in favor of the bank for the
payment of the loan. On the same occasion, Lopez also
executed in favor of Philamgen an indemnity agreement
whereby he agreed to indemnify the company against
any damages which the latter may sustain in
consequence of having become a surety upon the bond.
At the same time, Lopez executed a deed of assignment
of his shares of stock in the Baguio Military Institute,
Inc. in favor of Philamgen. When Lopez’ obligation
matured without being settled, Philamgen caused the
transfer of the shares of stocks to its name in order that
it may sell the same and apply the proceeds thereof in
payment of the loan to the bank. However, when no
payment was still made by the principal debtor or
surety, the bank filed a complaint which compelled
Philamgen to pay the bank. Thereafter, Philamgen filed
an action to recover the amount of the loan against
Lopez. The trial court therein held that the obligation of
Lopez was deemed paid when his shares of stocks were
transferred in the name of Philamgen. On appeal, the
Court of Appeals ruled that Lopez was still liable to
Philamgen because, pending payment, Philamgen was
merely holding the stock as security for the payment of
Lopez’ obligation.
In upholding the finding therein of the Court of Appeals,
We held that: jgc:chan roble s.com.p h
"Notwithstanding the express terms of the ‘Stock
Assignment Separate from Certificate’, however, We
hold and rule that the transaction should not be
regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution
thereof.
"It should be remembered that on June 2, 1959, the day
Lopez obtained a loan of P20,000.00 from Prudential
Bank, Lopez executed a promissory note for
P20,000.00, plus interest at the rate of ten (10%) per
cent per annum, in favor of said Bank. He likewise
posted a surety bond to secure his full and faithful
performance of his obligation under the promissory note
with Philamgen as his surety. In return for the
undertaking of Philamgen under the surety bond, Lopez
executed on the same day not only an indemnity
agreement but also a stock assignment.
"The indemnity agreement and stock assignment must
be considered together as related transactions because
in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be
principally considered. (Article 1371, New Civil Code).
Thus, considering that the indemnity agreement
connotes a continuing obligation of Lopez towards
Philamgen while the stock assignment indicates a
complete discharge of the same obligation, the
existence of the indemnity agreement whereby Lopez
had to pay a premium of P1,000.00 for a period of one
year and agreed at all times to indemnify Philamgen of
any and all kinds of losses which the latter might sustain
by reason of it becoming a surety, is inconsistent with
108 | P a g e #SJBL
the theory of an absolute sale for and in consideration of
the same undertaking of Philamgen. There would have
been no necessity for the execution of the indemnity
agreement if the stock assignment was really intended
as an absolute conveyance . . ." cralaw virtua1aw l ib rary
Along the same vein, in the case at bar it would not
have been necessary on the part of IRC and Santos to
execute promissory notes in favor of PNB if the
assignment of the time deposits of Santos was really
intended as an absolute conveyance.
There are cogent reasons to conclude that the parties
intended said deed of assignment to complement the
promissory notes. In declaring that the deed of
assignment did not operate as payment of the loan so
as to extinguish the obligations of IRC and Santos with
PNB, the trial court advanced several valid bases, to
wit:jgc:cha nrob les.co m.ph
"a. It is clear from the Deed of Assignment that it was
only by way of security;
x x x
"b. The promissory notes (Exhibits H and I) were
executed on August 16, 1967. If defendants IRC and
Raul L. Santos, upon executing the Deed of Assignment
on August 11, 1967 had already paid their loan of
P700,000.00 or otherwise extinguished the same, why
were the promissory notes made on August 16, 1967
still executed by IRC and signed by Raul L. Santos as
President?
"c. In the application for a credit line (Exhibit A), the
time deposits were offered as collateral." 9
For all intents and purposes, the deed of assignment in
this case is actually a pledge. Adverting again to the
Court’s pronouncements in Lopez, supra, we quote
therefrom: cra lawnad
"The character of the transaction between the parties is
to be determined by their intention, regardless of what
language was used or what the form of the transfer
was. If it was intended to secure the payment of money,
it must be construed as a pledge; but if there was some
other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to have
been absolute, its object and character might still be
qualified and explained by a contemporaneous writing
declaring it to have been a deposit of the property as
collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on
its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence
and is not discharged by the transfer, and that
accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that
effect in such a transaction if they are also commonly
used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership,
in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge." 10
The facts and circumstances leading to the execution of
the deed of assignment, as found by the court a quo
and the respondent court, yield said conclusion that it is
in fact a pledge. The deed of assignment has satisfied
the requirements of a contract of pledge (1) that it be
constituted to secure the fulfillment of a principal
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
obligation; (2) that the pledgor be the absolute owner of
the thing pledged; (3) that the persons constituting the
pledge have the free disposal of their property, and in
the absence thereof, that they be legally authorized for
the purpose. 11 The further requirement that the thing
pledged be placed in the possession of the creditor, or
of a third person by common agreement 12 was
complied with by the execution of the deed of
assignment in favor of PNB.
It must also be emphasized that Santos, as assignor,
made an express undertaking that he would remain
liable for any outstanding balance of his obligation
should PNB be unable to actually receive or collect the
assigned sums resulting from any agreements, orders or
decisions of the court or for any other cause
whatsoever. The term "for any cause whatsoever" is
broad enough to include the situation involved in the
present case.
Under the foregoing circumstances and considerations,
the unavoidable conclusion is that IRC and Santos
should be held liable to PNB for the amount of the loan
with the corresponding interest thereon.
2. We find nothing illegal in the interest of one and one-
half percent (1-1/2%) imposed by PNB pursuant to the
resolution of its Board which presumably was done in
accordance with ordinary banking procedures. Not only
did IRC and Santos fail to overcome the presumption of
regularity of business transactions, but they are likewise
estopped from questioning the validity thereof for the
first time in this petition. There is nothing in the records
to show that they raised this issue during the trial by
presenting countervailing evidence. What was merely
touched upon during the proceedings in the court below
was the alleged lack of notice to them of the board
resolution, but not the veracity or validity thereof.
3. On the issue of whether OBM should be held liable for
interests on the time deposits of IRC and Santos from
the time it ceased operations until it resumed its
business, the answer is in the negative.
We have held in The Overseas Bank of Manila v. Court
of Appeals and Tony D. Tapia, 13 that: jgc:chanrob les.co m.ph
"It is a matter of common knowledge, which We take
judicial notice of, that what enables a bank to pay
stipulated interest on money deposited with it is that
thru the other aspects of its operation it is able to
generate funds to cover the payment of such interest.
Unless a bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or
their proceeds and generally engage in other banking
and financing activities from which it can derive income,
it is inconceivable how it can carry on as a depository
obligated to pay stipulated interest. Conventional
wisdom dictates this inexorable fair and just conclusion.
And it can be said that all who deposit money in banks
are aware of such a simple economic proposition.
Consequently, it should be deemed read into every
contract of deposit with a bank that the obligation to
pay interest on the deposit ceases the moment the
operation of the bank is completely suspended by the
duly constituted authority, the Central Bank.
"We consider it of trivial consequence that the stoppage
of the bank’s operation by the Central Bank has been
subsequently declared illegal by the Supreme Court, for
before the Court’s order, the bank had no alternative
under the law than to obey the orders of the Central
Bank. Whatever be the juridical significance of the
109 | P a g e
subsequent action of the Supreme Court, the stubborn
fact remained that the petitioner was totally crippled
from then on from earning the income needed to meet
its obligations to its depositors. If such a situation
cannot, strictly speaking, be legally denominated as
‘force majeure’, as maintained by private respondent,
We hold it is a matter of simple equity that it be treated
as such." cralaw virtua 1aw lib rary
The Court further adjured that: jgc:chanro bles.c om.ph
"Parenthetically, We may add for the guidance of those
who might be concerned, and so that unnecessary
litigations be avoided from further clogging the dockets
of the courts, that in the light of the considerations
expounded in the above opinion, the same formula that
exempts petitioner from the payment of interest to its
depositors during the whole period of factual stoppage
of its operations by orders of the Central Bank, modified
in effect by the decision as well as the approval of a
formula of rehabilitation by this Court, should be, as a
matter of consistency, applicable or followed in respect
to all other obligations of petitioner which could not be
paid during the period of its actual complete closure." cralaw virt ua1aw li bra ry
We cannot accept the holding of the respondent Court of
Appeals that the above-cited decisions apply only where
the bank is in a state of liquidation. In the very case
aforecited, this issue was likewise raised and We
resolved: jg c:chan roble s.com.p h
"Thus, Our task is narrowed down to the resolution of
the legal problem of whether or not, for purposes of the
payment of the interest here in question, stoppage of
the operations of a bank by a legal order of liquidation
may be equated with actual cessation of the bank’s
operation, not different, factually speaking, in its
effects, from legal liquidation the factual cessation
having been ordered by the Central Bank.
"In the case of Chinese Grocer’s Association, Et. Al. v.
American Apothecaries, 65 Phil. 395, this Court held: jgc:chan robles. com.ph
"As to the second assignment of error, this Court, in
G.R. No. 43682, In re Liquidation of the Mercantile Bank
of China, Tan Tiong Tick, claimant and appellant, v.
American Apothecaries, C., Et Al., claimants and
appellees, through Justice Imperial, held the following:
virtua l 1aw lib rary
chan rob1 es
‘4. The court held that the appellant is not entitled to
charge interest on the amounts of his claims, and this is
the object of the second assignment of error. Upon this
point a distinction must be made between the interest
which the deposits should earn from their existence until
the bank ceased to operate, and that which they may
earn from the time the bank’s operations were stopped
until the date of payment of the deposits. As to the first
class, we hold that it should be paid because such
interest has been earned in the ordinary course of the
bank’s business and before the latter has been declared
in a state of liquidation. Moreover, the bank being
authorized by law to make use of the deposits with the
limitation stated, to invest the same in its business and
other operations, it may be presumed that it bound
itself to pay interest to the depositors as in fact it paid
interest prior to the dates of the said claims. As to the
interest which may be charged from the date the bank
ceased to do business because it was declared in a state
of liquidation, we hold that the said interest should not
be paid.’
"The Court of Appeals considered this ruling inapplicable
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
to the instant case, precisely because, as contended by
private respondent, the said Apothecaries case had in
fact in contemplation a valid order of liquidation of the
bank concerned, whereas here, the order of the Central
Bank of August 13, 1968 completely forbidding herein
petitioner to do business preparatory to its liquidation
was first restrained and then nullified by this Supreme
Court. In other words, as far as private respondent is
concerned, it is the legal reason for cessation of
operations, not the actual cessation thereof, that
matters and is decisive insofar as his right to the
continued payment of the interest on his deposit during
the period of cessation is concerned.
"In the light of the peculiar circumstances of this
particular case, We disagree. It is Our considered view,
after mature deliberation, that it is utterly unfair to
award private respondent his prayer for payment of
interest on his deposit during the period that petitioner
bank was not allowed by the Central Bank to operate."
libra ry
cralaw virtua1aw
4. Lastly, IRC and Santos claim that OBM should
reimburse them for whatever amounts they may be
adjudged to pay PNB by way of compensation for
damages incurred, pursuant to Articles 1170 and 2201
of the Civil Code.
It appears that as early as April, 1967, the financial
situation of OBM had already caused mounting concern
in the Central Bank. 14 On December 5, 1967, new
directors and officers drafted from the Central Bank
(CB) itself, the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP) were elected
and installed and they took over the management and
control of the Overseas Bank. 15 However, it was only
on July 31, 1968 when OBM was excluded from clearing
with the CB under Monetary Board Resolution No. 1263.
Subsequently, on August 2, 1968, pursuant to
Resolution No. 1290 of the CB, OBM’s operations were
suspended. 16 These CB resolutions were eventually
annulled and set aside by this Court on October 4, 1971
in the decision rendered in the herein cited case of
Ramos. chanroble s law lib ra ry
Thus, when PNB demanded from OBM payment of the
amounts due on the two time deposits which matured
on January 11, 1968 and February 6, 1968,
respectively, there was as yet no obstacle to the faithful
compliance by OBM of its liabilities thereunder.
Consequently, for having incurred in delay in the
performance of its obligation, OBM should be held liable
for damages. 17 When respondent Santos invested his
money in time deposits with OBM, they entered into a
contract of simple loan or mutuum, 18 not a contract of
deposit.
While it is true that under Article 1956 of the Civil Code
no interest shall be due unless it has been expressly
stipulated in writing, this applies only to interest for the
use of money. It does not comprehend interest paid as
damages. 19 OBM contends that it had agreed to pay
interest only up to the dates of maturity of the
certificates of time deposit and that respondent Santos
is not entitled to interest after the maturity dates had
expired, unless the contracts are renewed. This is true
with respect to the stipulated interest, but the
obligations consisting as they did in the payment of
money, under Article 1108 of the Civil Code he has the
right to recover damages resulting from the default of
OBM, and the measure of such damages is interest at
the legal rate of six percent (6%) per annum on the
amounts due and unpaid at the expiration of the periods
110 | P a g e #SJBL
respectively provided in the contracts. In fine, OBM is
being required to pay such interest, not as interest
income stipulated in the certificates of time deposit, but
as damages for failure and delay in the payment of its
obligations which thereby compelled IRC and Santos to
resort to the courts.
The applicable rule is that legal interest, in the nature of
damages for non-compliance with an obligation to pay a
sum of money, is recoverable from the date judicial or
extrajudicial demand is made, 20 which latter mode of
demand was made by PNB, after the maturity of the
certificates of time deposit, on March 1, 1968. 21 The
measure of such damages, there being no stipulation to
the contrary, shall be the payment of the interest
agreed upon in the certificates of deposit 22 which is six
and one-half percent (6-1/2%). Such interest due or
accrued shall further earn legal interest from the time of
judicial demand. 23
We reject the proposition of IRC and Santos that OBM
should reimburse them the entire amount they may be
adjudged to pay PNB. It must be noted that their
liability to pay the various interests of nine percent
(9%) on the principal obligation, one and one-half
percent (1-1/2%) additional interest and one percent
(1%) penalty interest is an offshoot of their failure to
pay under the terms of the two promissory notes
executed in favor of PNB. OBM was never a party to said
promissory notes. There is, therefore, no privity of
contract between OBM and PNB which will justify the
imposition of the aforesaid interests upon OBM whose
liability should be strictly confined to and within the
provisions of the certificates of time deposit involved in
this case. In fact, as noted by respondent court, when
OBM assigned as error that portion of the judgment of
the court a quo requiring OBM to make the disputed
reimbursement, IRC and Santos did not dispute that
objection of OBM. Besides, IRC and Santos are not
without fault. They likewise acted in bad faith when they
refused to comply with their obligations under the
promissory notes, thus incurring liability for all damages
reasonably attributable to the non-payment of said
obligations. 24
WHEREFORE, judgment is hereby rendered, ordering:
libra ry
cha nrob 1es vi rtua l 1a w
1. Integrated Realty Corporation and Raul L. Santos to
pay Philippine National Bank, jointly and severally, the
total amount of seven hundred thousand pesos
(P700,000.00), with interest thereon at the rate of nine
percent (9%) per annum from the maturity dates of the
two promissory notes on January 11 and February 6,
1968, respectively, plus one and one-half percent (1-
1/2%) additional interest per annum effective February
28, 1968 and additional penalty interest of one percent
(1%) per annum of the said amount of seven hundred
thousand pesos (P700,000.00) from the time of
maturity of said loan up to the time the said amount of
seven hundred thousand pesos (P700,000.00) is fully
paid to Philippine National Bank.
2. Integrated Realty Corporation and Raul L. Santos to
pay solidarily Philippine National Bank ten percent
(10%) of the amount of seven hundred thousand pesos
(P700,000.00) as and for attorney’s fees.
3. Overseas Bank of Manila to pay Integrated Realty
Corporation and Raul L. Santos the sum of seven
hundred thousand pesos (P700,000.00) due under Time
Deposit Certificates Nos. 2308 and 2367, with interest
thereon of six and one-half percent (6-1/2%) per
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s

annum from their dates of issue on January 11, 1967

and February 6, 1967, respectively, until the same are 17. Art. 1170, Civil Code.
fully paid, except that no interest shall be paid during
the entire period of actual cessation of operations by 18. Art. 1980, Civil Code.
Overseas Bank of Manila;
19. Civil Code of the Philippines Annotated, Paras, 10th
4. Overseas Bank of Manila to pay Integrated Realty Ed., Vol. V, 695.
Corporation and Raul L. Santos six and one-half per cent
(6-1/2%) interest in the concept of damages on the 20. Art. 1169, Civil Code.
principal amounts of said certificates of time deposit
from the date of extrajudicial demand by PNB on March 21. Exhibit L, Original Record, 317.
1, 1968, plus legal interest of six percent (6%) on said
interest from April 6, 1968, until full payment thereof, 22. Art. 2209, Civil Code.
except during the entire period of actual cessation of
operations of said bank. 23. Art. 2212, Civil Code.

5. Overseas Bank of Manila to pay Integrated Realty 24. Art. 2201, Civil Code.
Corporation and Raul L. Santos ten thousand pesos
(P10,000.00) as and for attorney’s fees.

SO ORDERED.

Melencio-Herrera, (Chairman), Paras, Padilla and

Sarmiento, JJ., concur.

Endnotes:

1. CA-G.R. No. 60005, penned by Associate Justice

Carolina C. Griño-Aquino, with the concurrence of
Associate Justices Milagros A. German and Vicente V.
Mendoza, Tenth Division; Annex A, Petition, G.R. No.
60705; Rollo, 36.

2. Petition, G.R. No. 60705, p. 24; Rollo, 32.

3. Petition, G.R. No. 60907, p. 1; Rollo, 8.

4. Civil Case No. 72557, Court of First Instance of

Manila, Branch XIX, Judge Victorino A. Savellano,
presiding.

* This should be April 6, 1968.

5. Annex A, Petition, G.R. No. 60705; Rollo, 36-39.

6. Record on Appeal, CA-G.R. No. 60005, 13-17.

7. Rollo, G.R. No. 60705, 42.

8. 114 SCRA 671 (1982).

9. Record on Appeal, 267-268.

10. Footnote 8, at p. 683, citing Am. Jur. 2d, Secured

Transactions, Sec. 50.

11. Art. 2085, Civil Code.

12. Art. 2093, Civil Code.

13. 105 SCRA 49 (1981); See also The Overseas Bank

of Manila v. Court of Appeals, Et Al., 113 SCRA 778
(1982).

14. Ramos, Et. Al. v. Central Bank of the Philippines, 41

SCRA 565, 573 (1971).

15. Id., 579.

16. Id., 572.

111 | P a g e #SJBL Deposits

CIVIL LAW | C r e d i t T r a n s a c t i o n s
THIRD DIVISION
[G.R. No. L-66826. August 19, 1988.]
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v.
THE INTERMEDIATE APPELLATE COURT and
RIZALDY T. ZSHORNACK respondents.
Pacis & Reyes Law Office for Petitioner.
Ernesto T. Zshornack, Jr. for Private Respondent.
SYLLABUS
1. CIVIL LAW; DEPOSIT; NATURE; CASE AT BAR. — The
Commercial Bank and Trust Co. (subsequently absorbed
by petitioner Bank of the Philippine Islands) through its
assistant branch manager for Quezon City
acknowledged receipt from the private respondent of
US$3,000.00 safekeeping. The subsequent acts of the
parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack
demanded the return of the money on May 10, 1976, or
over five months later. The above arrangement is that
contract defined under Article 1962, New Civil Code,
which reads: Art. 1962. A deposit is constituted from
the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
2. REMEDIAL LAW; ALLEGATIONS IN PLEADINGS;
EFFECT OF FAILURE TO SPECIFICALLY DENY THEREIN
THE DUE EXECUTIONS OF DOCUMENTS. — The
respondent’s second cause of action was based on an
actionable document. It was therefore incumbent upon
the bank to specifically deny under oath the due
execution of the document, as prescribed under Rule 8,
Section 8, if it desired: (1) to question the authority of
Garcia to bind the corporation; and (2) to deny its
capacity to enter into such contract. No sworn answer
denying the due execution of the document in question,
or questioning the authority of Garcia to bind the bank,
or denying the bank’s capacity to enter into the
contract, was ever filed. Hence, the bank is deemed to
have admitted not only Garcia’s authority, but also the
bank’s power, to enter into the contract in question.
3. ID.; VOID CONTRACTS; CONTRACTS EXECUTED
AGAINST A MANDATORY/PROHIBITORY LAW. — The
mere safekeeping of the greenbacks, without selling
them to the Central Bank within one business day from
receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a
mandatory/prohibitory law.
4. ID.; ID.; ID.; EFFECT. — It affords neither of the
parties a cause of action against the other. "When the
112 | P a g e #SJBL
nullity proceeds from the illegality of the cause or object
of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall
have no cause of action against each other . . ." [Art.
1411, New Civil Code.] The only remedy is one on
behalf of the State to prosecute the parties for violating
the law.
DECISION
CORTES, J.:
The original parties to this case were Rizaldy T.
Zshornack and the Commercial Bank and Trust
Company of the Philippines [hereafter referred to as
"COMTRUST." ] In 1980, the Bank of the Philippine
Islands (hereafter referred to as "BPI") absorbed
COMTRUST through a corporate merger, and was
substituted as party to the case. chanroble s.com.p h : virt ual law l ibra ry
Rizaldy Zshornack initiated proceedings on June 28,
1976 by filing in the Court of First Instance of Rizal —
Caloocan City a complaint against COMTRUST alleging
four causes of action. Except for the third cause of
action, the CFI ruled in favor of Zshornack. The bank
appealed to the Intermediate Appellate Court which
modified the CFI decision absolving the bank from
liability on the fourth cause of action. The pertinent
portions of the judgment, as modified, read:
c hanrob1es vi rt ual 1aw li bra ry
IN VIEW OF THE FOREGOING, the Court renders
judgment as follows:
chan rob1e s virtual 1 aw lib rary
1. Ordering the defendant COMTRUST to restore to the
dollar savings account of plaintiff (No. 25-4109) the
amount of U.S $1,000.00 as of October 27, 1975 to
earn interest together with the remaining balance of the
said account at the rate fixed by the bank for dollar
deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the
plaintiff the amount of U.S. $3,000.00 immediately upon
the finality of this decision, without interest for the
reason that the said amount was merely held in custody
for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it
cannot by law be deposited with plaintiffs dollar account
and defendant’s only obligation is to return the same to
plaintiff upon demand;
x x x
5. Ordering defendant COMTRUST to pay plaintiff in the
amount of P8,000.00 as damages in the concept of
litigation expenses and attorney’s fees suffered by
plaintiff as a result of the failure of the defendant bank
to restore to his (plaintiff’s) account the amount of U.S.
$1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it
be totally absolved from any liability to Zshornack. The
latter not having appealed the Court of Appeals
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
decision, the issues facing this Court are limited to the
bank’s liability with regard to the first and second
causes of action and its liability for damages.
1. We first consider the first cause of action.
On the dates material to this case, Rizaldy Zshornack
and his wife, Shirley Gorospe, maintained in
COMTRUST, Quezon City Branch, a dollar savings
account and a peso current account.
On October 27, 1975, an application for a dollar draft
was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a
certain Leovigilda D. Dizon in the amount of $1,000.00.
In the application, Garcia indicated that the amount was
to be charged to Dollar Savings Acct. No. 25-4109, the
savings account of the Zshornacks; the charges for
commission, documentary stamp tax and others
totalling P17.46 were to be charged to Current Acct. No.
210-465-29, again, the current account of the
Zshornacks. There was no indication of the name of the
purchaser of the dollar draft.
On the same date, October 27, 1975, COMTRUST, under
the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New
York, with an indication that it was to be charged to
Dollar Savings Acct. No. 25-4109. chanro bles. com : virt ual law l ibra ry
When Zshornack noticed the withdrawal of US$1,000.00
from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso
value of the withdrawal was given to Atty. Ernesto
Zshornack, Jr., brother of Rizaldy, on October 27,1975
when he (Ernesto) encashed with COMTRUST a cashier’s
check for P8,450.00 issued by the Manila Banking
Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court
finds no reason to disturb the ruling of both the trial
court and the Appellate Court on the first cause of
action. Petitioner must be held liable for the
unauthorized withdrawal of US$1,000.00 from private
respondent’s dollar account.
In its desperate attempt to justify its act of withdrawing
from its depositor’s savings account, the bank has
adopted inconsistent theories. First, it still maintains
that the peso value of the amount withdrawn was given
to Atty. Ernesto Zshornack, Jr. when the latter encashed
the Manilabank Cashier’s Check. At the same time, the
bank claims that the withdrawal was made pursuant to
an agreement where Zshornack allegedly authorized the
bank to withdraw from his dollar savings account such
amount which, when converted to pesos, would be
needed to fund his peso current account. If indeed the
peso equivalent of the amount withdrawn from the
dollar account was credited to the peso current account,
why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With
regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier’s check
is related to the transaction involving the dollar draft in
favor of Dizon financed by the withdrawal from Rizaldy’s
dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto
Zshornack, Jr., possesses a personality distinct and
separate from Rizaldy Zshornack. Payment made to
Ernesto cannot be considered payment to Rizaldy.
113 | P a g e
chanro bles. com : virt ual law l ibra ry
#SJBL
As to the second explanation, even if we assume that
there was such an agreement, the evidence do not show
that the withdrawal was made pursuant to it. Instead,
the record reveals that the amount withdrawn was used
to finance a dollar draft in favor of Leovigilda D. Dizon,
and not to fund the current account of the Zshornacks.
There is no proof whatsoever that peso Current Account
No. 210-465-29 was ever credited with the peso
equivalent of the US$1,000.00 withdrawn on October
27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed
with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia,
US$3,000.00 cash (popularly known as greenbacks) for
safekeeping, and that the agreement was embodied in a
document, a copy of which was attached to and made
part of the complaint. The document reads: chanrob 1es vi rtua l 1aw lib rary
Makati Cable Address: chanrob 1es vi rtua l 1aw lib rary
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS. SHIRLEY E. ZSHORNACK
Sir/Madam: chanrob1e s virtual 1aw l ibra ry
We acknowledged (sic) having received from you today
the sum of US DOLLARS: THREE THOUSAND ONLY
(US$3,000.00) for safekeeping.
Received by:(Sgd.)
VIRGILIO V. GARCIA
It was also alleged in the complaint that despite
demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000
was credited to Zshornack’s peso current account at
prevailing conversion rates.
It must be emphasized that COMTRUST did not deny
specifically under oath the authenticity and due
execution of the above instrument.
During trial, it was established that on December 8,
1975 Zshornack indeed delivered to the bank US$3,000
for safekeeping. When he requested the return of the
money on May 10, 1976, COMTRUST explained that the
sum was disposed of in this manner: US$2,000.00 was
sold on December 29, 1975 and the peso proceeds
amounting to P14,920.00 were deposited to Zshornack’s
current account per deposit slip accomplished by Garcia;
the remaining US$1,000. 00 was sold on February 3,
1976 and the peso proceeds amounting to P8,350.00
were deposited to his current account per deposit slip
also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly
credited to Zshornack’s current account at prevailing
conversion rates, BPI now posits another ground to
defeat private respondent’s claim. It now argues that
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
the contract embodied in the document is the contract
of depositum (as defined in Article 1962, New Civil
Code), which banks do not enter into. The bank alleges
that Garcia exceeded his powers when he entered into
the transaction. Hence, it is claimed, the bank cannot be
liable under the contract, and the obligation is purely
personal to Garcia.cralawnad
Before we go into the nature of the contract entered
into, an important point which arises on the pleadings,
must be considered.
The second cause of action is based on a document
purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the
second cause of action was based on an actionable
document. It was therefore incumbent upon the bank to
specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it
desired: (1) to question the authority of Garcia to bind
the corporation; and (2) to deny its capacity to enter
into such contract. [See, E.B. Merchant v. International
Banking Corporation, 6 Phil. 314 (1906).] No sworn
answer denying the due execution of the document in
question, or questioning the authority of Garcia to bind
the bank, or denying the bank’s capacity to enter into
the contract, was ever filed. Hence, the bank is deemed
to have admitted not only Garcia’s authority, but also
the bank’s power, to enter into the contract in question.
In the past, this Court had occasion to explain the
reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing
authorities will, we think, be readily appreciated. In
dealing with corporations the public at large is bound to
rely to a large extent upon outward appearances. If a
man is found acting for a corporation with the external
indicia of authority, any person, not having notice of
want of authority, may usually rely upon those
appearances; and if it be found that the directors had
permitted the agent to exercise that authority and
thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and
retained the benefit supposed to have been conferred by
it, the corporation will be bound notwithstanding the
actual authority may never have been granted . . .
Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently
known to very few, and the proof of it usually is not
readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is
therefore reasonable in a case where an officer of a
corporation has made a contract in its name, that the
corporation should be required, if it denies his authority,
to state such defense in its answer. By this means the
plaintiffs apprised of the fact that the agent’s authority
is contested; and he is given an opportunity to adduce
evidence showing either that the authority existed or
that the contract was ratified and approved [Ramirez v.
Orientalist Co. and Fernandez, 38 Phil. 634, 645-646
(1918).]
Petitioner’s argument must also be rejected for another
reason. The practical effect of absolving a corporation
from liability every time an officer enters into a contract
which is beyond corporate powers, even without the
proper allegation or proof that the corporation has not
authorized nor ratified the officer’s act, is to cast
corporations in so perfect a mold that transgressions
and wrongs by such artificial beings become impossible
[Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258
114 | P a g e #SJBL
(1860).] "To say that a corporation has no right to do
unauthorized acts is only to put forth a very plain
truism; but to say that such bodies have no power or
capacity to err is to impute to them an excellence which
does not belong to any created existence with which we
are acquainted. The distinction between power and right
is no more to be lost sight of in respect to artificial than
in respect to natural persons." [Ibid.]
Having determined that Garcia’s act of entering into the
contract binds the corporation, we now determine the
correct nature of the contract, and its legal
consequences, including its enforceability. cha nro bles. com:cra law:red
The document which embodies the contract states that
the US$3,000.00 was received by the bank for
safekeeping. The subsequent acts of the parties also
show that the intent of the parties was really for the
bank to safely keep the dollars and to return it to
Zshornack at a later time. Thus, Zshornack demanded
the return of the money on May 10, 1976, or over five
months later.
The above arrangement is that contract defined under
Article 1962, New Civil Code, which reads: chanrob 1es vi rtua l 1aw lib rary
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no deposit
but some other contract.
Note that the object of the contract between Zshornack
and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No.
20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which
was in force at the time the parties entered into the
transaction involved in this case. The circular provides:
virtua l 1aw lib rary
chan rob1 es
x x x
2. Transactions in the assets described below and all
dealings in them of whatever nature, including, where
applicable their exportation and importation, shall NOT
be effected, except with respect to deposit accounts
included in sub-paragraphs (b) and (c) of this
paragraph, when such deposit accounts are owned by
and in the name of banks.
(a) Any and all assets, provided they are held through,
in, or with banks or banking institutions located in the
Philippines, including money, checks, drafts, bullions,
bank drafts deposit accounts (demand, time and
savings), all debts, indebtedness or obligations, financial
brokers and investment houses notes, debentures,
stocks, bonds, coupons, bank acceptances, mortgages,
pledges, liens or other rights in the nature of security,
expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed,
and belonging to any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation residing or located
within the Philippines;
(b) Any and all assets of the kinds included and or
described in subparagraph (a) above, whether or not
held through, in, or with banks or banking institutions,
and existent within the Philippines, which belong to any
person, film, partnership, association, branch office,
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
agency, company or other unincorporated body or
corporation not residing or located within the
Philippines;
(c) Any and all assets existent within the Philippines
including money, checks, drafts, bullions, bank drafts,
all debts, indebtedness or obligations, financial
securities commonly dealt in by bankers, brokers and
investment houses, notes, debentures, stock, bonds,
coupons, bank acceptances, mortgages, pledges, liens
or other rights in the nature of security expressed in
foreign currencies, or if payable abroad, irrespective of
the currency in which they are expressed, and belonging
to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
x x x selling them to the Central Bank within one business
4. (a) All receipts of foreign exchange shall be sold daily
to the Central Bank by those authorized to deal in
foreign exchange. All receipts of foreign exchange by
any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or
corporation shall be sold to the authorized agents of the
Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any
person, firm, partnership, association, branch office,
agency, company or other unincorporated body or
corporation, residing or located within the Philippines,
who acquires on and after the date of this Circular
foreign exchange shall not unless licensed by the
Central Bank, dispose of such foreign exchange in whole
or in part, nor receive less than its full value, nor delay
taking ownership thereof except as such delay is
customary; Provided, further, That within one day upon
taking ownership, or receiving payment, of foreign
exchange the aforementioned persons and entities shall
sell such foreign exchange to designated agents of the
Central Bank.
x x x MODIFIED. Petitioner is ordered to restore to the dollar
8. Strict observance of the provisions of this Circular is
enjoined; and any person, firm or corporation, foreign
or domestic, who being bound to the observance
thereof, or of such other rules, regulations or directives
as may hereafter be issued in implementation of this
Circular, shall fail or refuse to comply with, or abide by,
or shall violate the same, shall be subject to the penal
sanctions provided in the Central Bank Act.
x x x
Paragraph 4 (a) above was modified by Section 6 of
Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by
limiting its coverage to Philippine residents only Section
6 provides:c han rob1es v irt ual 1aw li bra ry
SEC. 6. All receipts of foreign exchange by any resident
person, firm, company or corporation shall be sold to
authorized agents of the Central Bank by the recipients
within one business day following the receipt of such
foreign exchange. Any resident person, firm, company
or corporation residing or located within the Philippines,
who acquires foreign exchange shall not, unless
authorized by the Central Bank, dispose of such foreign
exchange in whole or in part, nor receive less than Its
115 | P a g e
full value, nor delay taking ownership thereof except as
such delay is customary; Provided, That, within one
business day upon taking ownership or receiving
payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to
the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts
of the parties show that they intended the bank to
safekeep the foreign exchange, and return it later to
Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intended to sell
the US dollars to the Central Bank within one business
day from receipt. Otherwise, the contract of depositum
would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without
day from receipt, is a transaction which is not
authorized by CB Circular No. 20, it must be considered
as one which falls under the general class of prohibited
transactions. Hence, pursuant to Article 5 of the Civil
Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of
action against the other. "When the nullity proceeds
from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties
being in pari delicto, they shall have no cause of action
against each other . . ." [Art. 1411, New Civil Code.]
The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the
second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts
a quo as damages in the concept of litigation expenses
and attorney’s fees to be reasonable. The award is
sustained. chanroble s law li bra ry : red
WHEREFORE, the decision appealed from is hereby
savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at
the rate fixed by the bank for dollar savings deposits.
Petitioner is further ordered to pay private respondent
the amount of P8,000.00 as damages. The other causes
of action of private respondent are ordered dismissed.
SO ORDERED.
Gutierrez, Jr. and Bidin, JJ., concur.
Fernan, C.J., no part — was counsel for Bank of P.I.
(Cebu).
Feliciano, J., in the result.
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. 60033. April 4, 1984.]
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN,
and TERESITA SANTOS, Petitioners, v. THE CITY
FISCAL OF MANILA, HON. JOSE B. FLAMINIANO,
ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, Respondents.
Feliciano C. Tumale, for Petitioners.
Asuncion, Gomez & de Leon for Private
Respondents.
The Solicitor General for Respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; SIMPLE
LOAN; FAILURE OF BANK TO RETURN THE AMOUNT
DEPOSITED, NOT A CASE OF ESTAFA. — When private
respondent David invested his money on time 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 governed by the
provisions concerning simple loan (Article 1980, Civil
Code). 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. 1(b)
of the Revised Penal Code, but it will only give rise to
civil liability over which the public respondents have no
jurisdiction.
2. ID.; ID.; ID.; OBLIGATION OF BANK UNDER
ORIGINAL TIME AND SAVINGS DEPOSIT IN CASE AT
BAR DEEMED NOVATED. — 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
116 | P a g e #SJBL
breach of trust but would merely be a failure to pay the
obligation as a debtor.
3. ID.; ID.; NOVATION; EFFECTS; MAY PREVENT RISE
OF CRIMINAL LIABILITY; CASE AT BAR. — 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. (Gonzales v. Serrano (25 SCRA 64,
69 [1968]; Ong v. Court of Appeals, L-058476, 124
SCRA 578, 580-581 [1983]; People v. Nery, 10 SCRA
244 [1964]. 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.
4. REMEDIAL LAW; CRIMINAL PROCEDURE; AS A RULE
CRIMINAL PROSECUTION MAY NOT BE SUBJECT OF
PROHIBITION AND INJUNCTION; EXCEPTION; CASE AT
BAR. — 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.
DECISION
MAKASIAR, 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. 81-31938 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
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
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: jgc:chan robles. com.ph
"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 Mañalac, Jaime V.
Paz, Paulino B. Dionisio, and one John Doe) with estafa
and violation of Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition,
Annex ‘A’): jgc:chanrobles. com.ph
"‘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
time 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 (all 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
and petitioner Santos, then NSLA General Manager; that
on March 21, 1981 NSLA 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:jg c:chan roble s.com. ph
"‘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
interests above the legal rate, and 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
117 | P a g e
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 one half (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 following: jg c:chan roble s.com.p h
"‘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 of 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 Promissory 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
recorded (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.chanrobles.c om.ph : vi rtual law lib rary
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
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 Teofisto
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, rec.). 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
P1,336,614.02 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 time 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: jgc:chan robles. com.ph
"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 v. Morfe
(63 SCRA 114, 119 [1975], We said: jgc:chan rob les.com. ph
"It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are
not true deposits. They are considered simple loans and,
as such, are not preferred credits (Art. 1980 Civil Code:
In re Liquidation of Mercantile Bank of China: Tan Tiong
Tick v. American Apothecaries Co., 65 Phil. 414; Pacific
Coast Biscuit Co. v. Chinese Grocers Association, 65
118 | P a g e
Phil. 375; Fletcher American National Bank v. Ang
Cheng Lian, 65 Phil. 385; Pacific Commercial Co. v.
American Apothecaries Co., 65 Phil. 429; Gopoco
Grocery v. Pacific Coast Biscuit Co., 65 Phil. 443)." cralaw virtua1aw l ibra ry
This Court also declared in the recent case of Serrano v.
Central Bank of the Philippines (96 SCRA 96, 102
[1980]) that: chanro bles. com.ph : vi rtua l law lib rary
"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 v.
Phil. National Bank, 62 Phil. 519). Current and savings
deposits are loans to a bank because it can use the
same. The petitioner here in making time deposits that
earn interests with 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
depository’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. 1(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: jgc:chan robles. com.ph
"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 same money,
goods or personal property that he received. Petitioners
had no such obligation to return the same money, i.e.,
the bills or coins, which they received from private
respondents. This is so because as clearly 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.
"‘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
cralaw virtu a1aw lib rary 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 be 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
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
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 v. 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 v. Serrano (25 SCRA 64, 69 [1968]) We held
that: cralawnad
"As pointed out in People v. 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."
libra ry
cralaw virtu a1aw
Again, in the latest case of Ong v. Court of Appeals (L-
58476, 124 SCRA 578, 580-581 [1983]), this Court
reiterated the ruling in People v. Nery (10 SCRA 244
[1964]), declaring that: jgc:cha nrob les.com .ph
"The novation theory may perhaps apply prior to the
filing 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 v. Gervacio, 54 Off.
Gaz. 2898; People v. Velasco, 42 Phil. 76; U.S. v.
Montañes, 8 Phil. 620).
"It may be observed in this regard that novation is not
one of the means recognized by the Penal Code
119 | P a g e #SJBL
whereby criminal liability can be extinguished; hence,
the role of novation may only be to either prevent the
rise of criminal liability 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 v. People, 90 Phil. 581; U.S. v. Villareal, 27 Phil.
481)."cralaw virtua1aw li bra ry
In the case at bar, there is no dispute that petitioners
Guingona and Martin executed a promissory note on
June 17, 1981 assuming the obligation of the bank to
private respondent David; while the criminal complaint
for estafa was filed on December 23, 1981 with the
Office of the City Fiscal. Hence, it is clear that novation
occurred long before the filing of the criminal complaint
with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal
liability would be avoided but there will still be a civil
liability on the part of petitioners Guingona and Martin
to pay the assumed obligation.
Petitioners herein were likewise charged with violation
of Section 3 of Central Bank Circular No. 364 and other
related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the
amount of US$75,000.00 without authority from the
Central Bank. They contend however, that the US
dollars intended by respondent David for deposit were
all converted into Philippine currency before acceptance
and deposit into Nation Savings and Loan Association. chanrobles law lib rary
Petitioners’ contention is worthy of belief for the
following reasons: cha nro b1es vi rtua l 1aw lib ra ry
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
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s

Nation Savings and Loan Association. Considering that RESPONDENT.

this might adversely affect his case, respondent David
should have promptly denied petitioners’ allegation. SO ORDERED.

In conclusion, considering that the liability of the Concepcion, Jr., Guerrero, De Castro and Escolin, JJ.,
petitioners is purely civil in nature and that there is no concur.
clear showing that they engaged in foreign exchange
transactions, We hold that the public respondents acted Aquino, J., took no part.
without jurisdiction when they investigated the charges
against the petitioners. Consequently, public Abad Santos, J., concurs in the result.
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:jgc:chanro bles. com.ph

"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: jgc:cha nro bles. com.ph

"‘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 v.
Municipality of Urdaneta, Pangasinan, 93 SCRA 462,
469-470 [1979]; citing Ramos v. Torres, 25 SCRA 557
[1968]; and Hernandez v. Albano, 19 SCRA 95, 96
[1967]).

Likewise, in Lopez v. The City Judge, Et. Al. (18 SCRA

616, 621-622 [1966]), We held that: chanroblesv irt ualawli bra ry

"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 v. 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 and the advancement
of public policy, In Dimayuga v. 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 v. 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." cralaw vi rtua 1aw lib rary

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE

TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED
IS MADE PERMANENT. COSTS AGAINST THE PRIVATE

120 | P a g e #SJBL Deposits

CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. 116792. March 29, 1996.]
BANK OF THE PHILIPPINE ISLANDS and GRACE
ROMERO, Petitioners, v. COURT OF APPEALS and
EDVIN E. REYES, Respondents.
Ricardo R. Gatdula, Jr., for Petitioners.
H . D. Tumaneng & Associates Law Office
for Private Respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATION AND CONTRACTS;
EXTINGUISHMENT OF OBLIGATION; COMPENSATION;
WHEN APPLICABLE. — Compensation shall take place
when two persons, in their own right, are creditors and
debtors of each other. Article 1290 of the Civil Code
provides that "when all the requisites mentioned in
Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and
debtors are not aware of the compensation. "Legal
compensation operates even against the will of the
interested parties and even without the consent of
them. Since this compensation takes place ipso jure, its
effects arise on the very day on which all its requisites
concur. When used as a defense, it retroacts to the date
when its requisites are fulfilled.
2. ID.; ID.; ID.; ID.; ELEMENTS; PRESENT IN CASE AT
BAR. — The elements of legal compensation are all
present in the case at bar. The obligors bound
principally are at the same time creditors of each other.
Petitioner bank stands as a debtor of the private
respondent, depositor. At the same time, said bank is
the creditor of the private respondent with respect to
the dishonored U.S. Treasury Warrant which the latter
illegally transferred to his joint account. The debts
involves consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a
third person.
3. ID.; ID.; ID.; ID.; ID.; PRESENCE OF PRIVATE
RESPONDENT’S WIFE DOES NOT NEGATE THE ELEMENT
OF MUTUALITY OF PARTIES; CASE AT BAR. — It is true
that the joint account of private respondent and his wife
was debited in the case at bar. We hold that the
presence of private respondent’s wife does not negate
the element of mutuality of parties, i.e., that they must
be creditors and debtors of each other in their own
right. The wife of private respondent is not a party in
the case at bar. She never asserted any right to the
debited U.S. Treasury Warrant. Indeed, the right of the
petitioner bank to make the debit is clear and cannot be
doubted. To frustrate the application of legal
compensation on the ground that the parties are not all
mutually obligated would result in unjust enrichment on
the part of the private respondent and his wife who
herself out of honesty has not objected to the debit. The
rule as to mutuality is strictly applied at law. But not in
121 | P a g e #SJBL
equity, where to allow the same would defeat a clear
right or permit irremediable injustice.
DECISION
PUNO, J.:
Petitioners seek a review of the Decision 1 of
respondent Court of Appeals in reversing the Decision 2
of the Regional Trial Court of Quezon City, Branch 79,
and ordering petitioners to credit private respondent’s
Savings Account No. 3185-0172-56 with P10,556.00
plus interest.
The facts reveal that on September 25, 1985, private
respondent Edvin F. Reyes opened Savings Account No.
3185- 0172-56 at petitioner Bank of the Philippine
Islands (BPI) It is a joint "AND/OR" Cubao, Shopping
Center Branch. account with his wife, Sonia S. Reyes.
Private respondent also held a joint "AND/OR" Savings
Account No. 3185-0128-82 with his grandmother,
Emeteria M. Fernandez, opened on February 11, 1986 at
the same BPI branch. He regularly deposited in this
account the U.S. Treasury Warrants payable to the
order of Emeteria M. Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989
without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant
No. 21667302 dated January 1, 1990 in the amount of
U.S. $377.00 3 or P10,556.00. On January 4, 1990,
private respondent deposited the said U.S. treasury
check of Fernandez in Savings Account No. 3185-0128-
82. The U.S. Veterans Administration Office in Manila
conditionally cleared the check. 4 The check was then
sent to the United States for further clearing. 5
Two months after or on March 8, 1990, private
respondent closed Savings Account No. 3185-0128-82
and transferred its funds amounting to P13,112.91 to
Savings Account No. 3185-0172-56, the joint account
with his wife.
On January 16, 1991, U.S. Treasury Warrant No.
21667302 was dishonored as it was discovered that
Fernandez died three (3) days prior to its issuance. The
U.S. Department of Treasury requested petitioner bank
for a refund. 6 For the first time petitioner bank came to
know of the death of Fernandez.
On February 19, 1991, private respondent received a PT
& T urgent telegram from petitioner bank requesting
him to contact Manager Grace S. Romero or Assistant
Manager When he called up the bank, he was informed
that the treasury check was the subject of a claim by
Citibank NA, correspondent of petitioner bank. He
assured petitioners that he would drop by the bank to
look into the matter. He also verbally authorized them
to debit from his other joint account the amount stated
in the dishonored U.S. Treasury Warrant. 7 On the same
day, petitioner bank debited the amount of P10,556.00
from private respondent’s Savings Account No. 3185-
0172-56.
On February 21, 1991, private respondent with his
lawyer Humphrey Tumaneng visited the petitioner bank
and the refund documents were shown to them.
Surprisingly, private respondent demanded from
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
petitioner bank restitution of the debited amount. He
claimed that because of the debit, he failed to withdraw
his money when he needed them. He then filed a suit
for Damages 8 against petitioners before the Regional
Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter claimed
for moral and exemplary damages. By way of Special
and Affirmative Defense, they averred that private
respondent gave them his express verbal authorization
to debit the questioned amount. They claimed that
private respondent later refused to execute a written
authority. 9
In a Decision dated January 20, 1993, the trial court
dismissed the complaint of private respondent for lack
of cause of action. 10
Private respondent appealed to the respondent Court of
Appeals. On August 16, 1994, the Sixteenth Division of
respondent court in AC-G.R. CV No. 41543 reversed the
impugned decision, viz:
"WHEREFORE, the judgment appealed from is set aside,
and another one entered ordering defendant (petitioner)
to credit plaintiffs (private respondent’s) S.A. No. 3185-
0172-56 with P10,556.00 plus interest at the applicable
rates for express teller savings accounts from February
19, 1991, until compliance herewith. The claim and
counterclaim for damages are dismissed for lack of
merit.
SO ORDERED." 11
Petitioners now contend that respondent Court of
Appeals erred:
cha nro b1es vi rtua l 1aw lib ra ry
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
NOT HOLDING THAT RESPONDENT REYES GAVE
EXPRESS AUTHORITY TO PETITIONER BANK TO DEBIT
HIS JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE
OF THE RETURNED U.S. TREASURY WARRANT.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
NOT HOLDING THAT PETITIONER BANK HAS LEGAL
RIGHT TO APPLY THE DEPOSIT OF RESPONDENT REYES
TO HIS OUTSTANDING OBLIGATION TO PETITIONER
BANK BROUGHT ABOUT BY THE RETURN OF THE U.S.
TREASURY WARRANT HE EARLIER DEPOSITED UNDER
THE PRINCIPLE OF "LEGAL COMPENSATION."
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
NOT APPLYING CORRECTLY THE PRINCIPLES
ENUNCIATED BY THE SUPREME COURT IN THE CASE OF
GULLAS V. PNB, 62 PHIL 519.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
NOT APPRECIATING THE FACT THAT THE MONEY
DEBITED BY PETITIONER BANK WAS THE SAME MONEY
TRANSFERRED BY RESPONDENT REYES FROM HIS
122 | P a g e
JOINT "AND/OR" ACCOUNT WITH HIS GRANDMOTHER
TO HIS JOINT "AND/OR" ACCOUNT WITH HIS WIFE."
12
We find merit in the petition.
The first issue for resolution is whether private
respondent verbally authorized petitioner bank to debit
his joint account with his wife for the amount of the
returned U.S. Treasury Warrant. We find that petitioners
were able to prove this verbal authority by
preponderance of evidence. The testimonies of Bernardo
and Romero deserve credence. Bernardo testified: cha nrob 1es vi rtual 1aw lib rary
x x x
"Q: After that, what happened?
A: . . . Dr. Reyes Called me up and I informed of the
U.S. Treasury Warrant and we are requested to
jgc:c hanro bles. com.ph
reimburse for the amount.
Q: What was his response if any?
A: Don’t you worry about it, there is no personal
problem.
x x x
Q: And so what was his response?
A: He said that ‘don’t you worry about it’
x x x
"I
Q: You said that you asked him the advice and he did
not answer, what advice are you referring to?
A: In our conversation, he promised me that he will give
me written confirmation or authorization." 13
The conversation was promptly relayed to romero who
testified:
chan rob1e s virtual 1aw l ibra ry
II
x x x
"Q: . . . Was there any opportunity wherein said Mrs.
Bernardo was able to convey to you the contents of
their conversation?
A: This was immediately relayed to me as manager of
cralaw virtua1aw l ibra ry
the Bank of the Philippine Islands, sir.
III Q: What, if any was the content of her conversation, if
you know?
A: Mr. Reyes instructed Mrs. Bernardo to debit his
account with the bank. His account was maintained
jointly with his wife then he promised to drop by to give
us a written confirmation, sir.
IV x x x
Q: You said that you authorized the debiting of the
account on February 19, 1991, is that correct?
A: I did not authorize, we merely followed the
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
instruction of Mr. Reyes, sir." 14
We are not disposed to believe private respondent’s
allegation that he did not give any verbal authorization.
His testimony is uncorroborated. Nor does he inspire
credence. His past and fraudulent conduct is an
evidence against him. 15 He concealed from petitioner
bank the death of Fernandez on December 28, 1989. 16
As of that date, he knew that Fernandez was no longer
entitled to receive any pension. Nonetheless, he still
received the U.S. Treasury Warrant of Fernandez, and
on January 4, 1990 deposited the same in Savings
Account No. 3185-0128- 82. To pre-empt a refund,
private respondent closed his joint account with
Fernandez (Savings Account No. 31-85- 0128-82) on
March 8, 1990 and transferred its balance to his joint
account with his wife (Savings Account No. 3185-0172-
56). Worse, private respondent declared under the
penalties of perjury in the withdrawal slip 17 dated
March 8, 1990 that his co-depositor, Fernandez, is still
living. By his acts, private respondent has stripped
himself of credibility.
More importantly, the respondent court erred when it
failed to rule that legal compensation is proper.
Compensation shall take place when two persons, in
their of each other. 18 Article 1290 of the Civil Code
provides that "when all the requisites mentioned in
Article 1279 are present, compensation takes effect by
operation of law and, extinguishes both debts to the
concurrent amount, even though the creditors and
debtors are not aware of the compensation." Legal
compensation operates even against the will of the
interested parties and even without the consent of
them. 19 Since this compensation takes place ipso jure,
its effects arise on the very day on which all its
requisites concur. 20 When used as a defense, it
retroacts to the date when its requisites are fulfilled. 21
Article 1279 states that in order that may be proper, it
is necessary:jgc:chan roble s.com.p h
"(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor."
cralaw virtua1aw l ibra ry
The elements of legal compensation are all present in
the case at bar. The obligors bound principally are at the
same time creditors of each other. Petitioner bank
stands as a debtor of the private respondent, a
depositor. At the same time, said bank is the creditor of
the private respondent with respect to the dishonored
U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved
consist of a sum of money. They are due, liquidated,
and demandable. They are not claimed by a third
person.
It is true that the joint account of private respondent
and his wife was debited in the case at bar. We hold
123 | P a g e
that the presence of private respondent’s wife does not
negate the element of mutuality of parties, i.e., that
they must be creditors and debtors of each other in
their own right. The wife of private respondent is not a
party in the case at bar. She never asserted any right to
the debited U.S. Treasury Warrant. Indeed, the right of
the petitioner bank to make the debit is clear and
cannot be doubted. To frustrate the application of legal
compensation on the ground that the parties are not all
mutually obligated would result in unjust enrichment on
the part of the private respondent and his wife who
herself out of honesty has not objected to the debit. The
rule as to mutuality is strictly applied at law. But not in
equity, where to allow the same would defeat right or
permit irremediable injustice. 22
IN VIEW HEREOF, the Decision of respondent Court of
Appeals in CA-G.R. CV No. 41543 dated August 16,
1994 is ANNULLED and SET ASIDE and the Decision of
the trial court in Civil Case No. Q-91-8451 dated
January 20, 1993 is REINSTATED. Costs against
private Respondent.
SO ORDERED.
Regalado, Romero and Mendoza, JJ., concur.
Torres, J., is on leave.
Endnotes:
1. Sixteenth Division.
2. Honorable Godofredo L. Legazpi, Presiding Judge.
3. Exhibit "6;" Original Records, p. 117.
4. TSN of June 17, 1992, pp. 12-14.
5. TSN of March 27, 1992 p. 14.
6. Exhibit "5;" Original Records, p. 116.
7. CA Decision, p. 2; Rollo, p. 43.
8. Docketed as Civil Case No. Q-91-8451.
9. Id., CA Decision, p. 3; Rollo p. 44.
10. RTC Decision, p. 11.
11. Id., CA Decision, p. 9; Rollo, p. 50.
12. Petition, pp. 7-8; Rollo, pp. 26-27.
13. TSN of January 9, 1992, pp. 9-12.
14. TSN of June 17, 1992, pp. 7-8, 23.
15. See People v. Maranion, G.R. Nos. 90672-73, July
18, 1991, 199 SCRA 421.
16. TSN of November 22, 1991, p. 9.
17. Exhibit "3; n Original Records p. 114.
18. Civil Code, Article 1278.
19. Padilla, Ambrosio, Civil Law, Civil Code Annotated,
vol. IV, 1987 ed., pp. 612-613.
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s

20. See Tolentino, Arturo M., Commentaries and

Jurisprudence on the Civil Code of the Philippines, Vol.
IV, 1991 ed., p. 379.

21. See Republic v. CA, No. L-25012, July 22, 1975, 65

SCRA 186.

22. See 10 AM JUR 2d, Banks, p. 638, citing Lamb v.

Morris, 20 NE 746.

124 | P a g e #SJBL Deposits

CIVIL LAW | C r e d i t T r a n s a c t i o n s
THIRD DIVISION
[G.R. NO. 156132 : February 6, 2007]
CITIBANK, N.A. (Formerly First National City
Bank) and INVESTORS' FINANCE CORPORATION,
doing business under the name and style of FNCB
Finance, Petitioners, v. MODESTA R.
SABENIANO,Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its
Decision1 in the above-entitled case, the dispositive
portion of which reads'
IN VIEW OF THE FOREGOING, the instant Petition
is PARTLY GRANTED. The assailed Decision of the
Court of Appeals in CA-G.R. No. 51930, dated 26 March
2002, as already modified by its Resolution, dated 20
November 2002, is hereby AFFIRMED WITH
MODIFICATION, as follows '
1. PNs No. 23356 and 23357 are DECLARED subsisting
and outstanding. Petitioner Citibank is ORDERED to
return to respondent the principal amounts of the said
PNs, amounting to Three Hundred Eighteen Thousand
Eight Hundred Ninety-Seven Pesos and Thirty-Four
Centavos (P318,897.34) and Two Hundred Three
Thousand One Hundred Fifty Pesos (P203,150.00),
respectively, plus the stipulated interest of Fourteen and
a half percent (14.5%) per annum, beginning 17 March
1977;
2. The remittance of One Hundred Forty-Nine Thousand
Six Hundred Thirty Two US Dollars and Ninety-Nine
Cents (US$149,632.99) from respondent's Citibank-
Geneva accounts to petitioner Citibank in Manila, and
the application of the same against respondent's
outstanding loans with the latter, is DECLARED illegal,
null and void. Petitioner Citibank is ORDERED to refund
to respondent the said amount, or its equivalent in
Philippine currency using the exchange rate at the time
of payment, plus the stipulated interest for each of the
fiduciary placements and current accounts involved,
beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent
moral damages in the amount of Three Hundred
Thousand Pesos (P300,000.00); exemplary damages in
the amount of Two Hundred Fifty Thousand Pesos
(P250,000.00); and attorney's fees in the amount of
Two Hundred Thousand Pesos (P200,000.00); and
cralawlib rary
4. Respondent is ORDERED to pay petitioner Citibank
the balance of her outstanding loans, which, from the
respective dates of their maturity to 5 September 1979,
was computed to be in the sum of One Million Sixty-
Nine Thousand Eight Hundred Forty-Seven Pesos and
Forty Centavos (P1,069,847.40), inclusive of interest.
125 | P a g e
These outstanding loans shall continue to earn interest,
at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano
filed an Urgent Motion to Clarify and/or Confirm Decision
with Notice of Judgment on 20 October 2006; while,
petitioners Citibank, N.A. and FNCB Finance2 filed their
Motion for Partial Reconsideration of the foregoing
Decision on 6 November 2006.
The facts of the case, as determined by this Court in its
Decision, may be summarized as follows.
Respondent was a client of petitioners. She had several
deposits and market placements with petitioners,
among which were her savings account with the local
branch of petitioner Citibank (Citibank-Manila3 ); money
market placements with petitioner FNCB Finance; and
dollar accounts with the Geneva branch of petitioner
Citibank (Citibank-Geneva). At the same time,
respondent had outstanding loans with petitioner
Citibank, incurred at Citibank-Manila, the principal
amounts aggregating to P1,920,000.00, all of which had
become due and demandable by May 1979. Despite
repeated demands by petitioner Citibank, respondent
failed to pay her outstanding loans. Thus, petitioner
Citibank used respondent's deposits and money market
placements to off-set and liquidate her outstanding
obligations, as follows '
Respondent's outstanding obligation (principa
and interest as of 26 October 1979)
Less: Proceeds from respondent's money mar
placements with petitioner FNCB Financ
(principal and interest as of 5 Septembe
1979)
Deposits in respondent's bank accounts
with petitioner Citibank
Proceeds of respondent's money marke
placements and dollar accounts with
Citibank-Geneva (peso equivalent as of
October 1979)
Balance of respondent's obligation
Respondent, however, denied having any outstanding
loans with petitioner Citibank. She likewise denied that
she was duly informed of the off-setting or
compensation thereof made by petitioner Citibank using
her deposits and money market placements with
petitioners. Hence, respondent sought to recover her
deposits and money market placements.
Respondent instituted a complaint for "Accounting, Sum
of Money and Damages" against petitioners, docketed
as Civil Case No. 11336, before the Regional Trial Court
(RTC) of Makati City. After trial proper, which lasted for
a decade, the RTC rendered a Decision4 on 24 August
1995, the dispositive portion of which reads'
#SJBL Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
WHEREFORE, in view of all the foregoing, decision is
hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected
by the defendant Bank [petitioner Citibank] of plaintiff's
[respondent Sabeniano] dollar deposit with Citibank,
Switzerland, in the amount of US$149,632.99, and
ordering the said defendant [petitioner Citibank] to
refund the said amount to the plaintiff with legal interest
at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully
paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano]
indebted to the defendant Bank [petitioner Citibank] in
the amount of P1,069,847.40 as of 5 September 1979
and ordering the plaintiff [respondent Sabeniano] to pay
said amount, however, there shall be no interest and
penalty charges from the time the illegal setoff was
effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims
interposed by the parties against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC
Decision to the Court of Appeals, docketed as CA-G.R.
CV No. 51930. On 26 March 2002, the appellate court
promulgated its Decision,5 ruling entirely in favor of
respondent, to wit'
Wherefore, premises considered, the assailed 24 August
1995 Decision of the court a quo is hereby AFFIRMED
with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected
by the defendant-appellant Bank of the plaintiff-
appellant's dollar deposit with Citibank, Switzerland, in
the amount of US$149,632.99, and ordering defendant-
appellant Citibank to refund the said amount to the
plaintiff-appellant with legal interest at the rate of
twelve percent (12%) per annum, compounded yearly,
from 31 October 1979 until fully paid, or its peso
equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by
competent evidence the alleged indebtedness of
plaintiff-appellant, the set-off of P1,069,847.40 in the
account of Ms. Sabeniano is hereby declared as without
legal and factual basis;
3. As defendants-appellants failed to account the
following plaintiff-appellant's money market placements,
savings account and current accounts, the former is
hereby ordered to return the same, in accordance with
the terms and conditions agreed upon by the contending
parties as evidenced by the certificates of investments,
to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and
Supersedes NNPN No. 22526) issued on 17 March
1977, P318,897.34 with 14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and
Supersedes NNPN No. 22528) issued on 17 March
1977, P203,150.00 with 14.50 interest p.a.;
126 | P a g e #SJBL
(iii) FNCB NNPN Serial No. 05757 (Cancels and
Supersedes NNPN No. 04952), issued on 02 June
1977, P500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and
Supersedes NNPN No. 04962), issued on 02 June
1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market
placements of Ms. Sabeniano with the Ayala Investment
& Development Corporation (AIDC) with legal interest at
the rate of twelve percent (12%) per annum
compounded yearly, from 30 September 1976 until fully
paid;
4. Ordering defendants-appellants to jointly and
severally pay the plaintiff-appellant the sum of FIVE
HUNDRED THOUSAND PESOS (P500,000.00) by way of
moral damages, FIVE HUNDRED THOUSAND PESOS
(P500,000.00) as exemplary damages, and ONE
HUNDRED THOUSAND PESOS (P100,000.00) as
attorney's fees.
Acting on petitioners' Motion for Partial Reconsideration,
the Court of Appeals issued a Resolution,6 dated 20
November 2002, modifying its earlier Decision, thus'
WHEREFORE, premises considered, the instant Motion
for Reconsideration is PARTIALLY GRANTED as Sub-
paragraph (V) paragraph 3 of the
assailed Decision's dispositive portion is hereby
ordered DELETED.
The challenged 26 March 2002 Decision of the Court
is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March
2002, as modified by the Resolution of the same court,
dated 20 November 2002, was still principally in favor of
respondent, petitioners filed the instant Petition for
Review on Certiorari under Rule 45 of the Revised Rules
of Court. After giving due course to the instant Petition,
this Court promulgated on 16 October 2006 its Decision,
now subject of petitioners' Motion for Partial
Reconsideration. ς ηα ñrοblεš ν ιr†υαl l αω lιb rα rÿ
Among the numerous grounds raised by petitioners in
their Motion for Partial Reconsideration, this Court shall
address and discuss herein only particular points that
had not been considered or discussed in its Decision.
Even in consideration of these points though, this Court
remains unconvinced that it should modify or reverse in
any way its disposition of the case in its earlier Decision.
As to the off-setting or compensation of respondent's
outstanding loan balance with her dollar deposits in
Citibank-Geneva
Petitioners' take exception to the following findings
made by this Court in its Decision, dated 16 October
2006, disallowing the off-setting or compensation of the
balance of respondent's outstanding loans using her
dollar deposits in Citibank-Geneva'
Without the Declaration of Pledge, petitioner Citibank
had no authority to demand the remittance of
respondent's dollar accounts with Citibank-Geneva and
to apply them to her outstanding loans. It cannot effect
legal compensation under Article 1278 of the Civil Code
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
since, petitioner Citibank itself admitted that Citibank-
Geneva is a distinct and separate entity. As for the
dollar accounts, respondent was the creditor and
Citibank-Geneva is the debtor; and as for the
outstanding loans, petitioner Citibank was the creditor
and respondent was the debtor. The parties in these
transactions were evidently not the principal creditor of
each other.
Petitioners maintain that respondent's Declaration of
Pledge, by virtue of which she supposedly assigned her
dollar accounts with Citibank-Geneva as security for her
loans with petitioner Citibank, is authentic and, thus,
valid and binding upon respondent. Alternatively,
petitioners aver that even without said Declaration of
Pledge, the off-setting or compensation made by
petitioner Citibank using respondent's dollar accounts
with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly
authorized by respondent herself in the promissory
notes (PNs) she signed for her loans, as well as
sanctioned by Articles 1278 to 1290 of the Civil Code.
This alternative argument is anchored on the premise
that all branches of petitioner Citibank in the Philippines
and abroad are part of a single worldwide corporate
entity and share the same juridical personality. In
connection therewith, petitioners deny that they ever
admitted that Citibank-Manila and Citibank-Geneva are
distinct and separate entities.
Petitioners call the attention of this Court to the
following provision found in all of the PNs7 executed by
respondent for her loans'
At or after the maturity of this note, or when same
becomes due under any of the provisions hereof, any
money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the
undersigned on the books of CITIBANK, N.A. in transit
or in their possession, may without notice be applied at
the discretion of the said bank to the full or partial
payment of this note.
It is the petitioners' contention that the term "Citibank,
N.A." used therein should be deemed to refer to all
branches of petitioner Citibank in the Philippines and
abroad; thus, giving petitioner Citibank the authority to
apply as payment for the PNs even respondent's dollar
accounts with Citibank-Geneva. Still proceeding from
the premise that all branches of petitioner Citibank
should be considered as a single entity, then it should
not matter that the respondent obtained the loans from
Citibank-Manila and her deposits were with Citibank-
Geneva. Respondent should be considered the debtor
(for the loans) and creditor (for her deposits) of the
same entity, petitioner Citibank. Since petitioner
Citibank and respondent were principal creditors of each
other, in compliance with the requirements under Article
1279 of the Civil Code,8 then the former could have very
well used off-setting or compensation to extinguish the
parties' obligations to one another. And even without
the PNs, off-setting or compensation was still authorized
because according to Article 1286 of the Civil Code,
"Compensation takes place by operation of law, even
though the debts may be payable at different places,
but there shall be an indemnity for expenses of
exchange or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise
known as the General Banking Law of 2000, governing
bank branches are reproduced below'
127 | P a g e #SJBL
SEC. 20. Bank Branches. - Universal or commercial
banks may open branches or other offices within or
outside the Philippines upon prior approval of
the Bangko Sentral.
Branching by all other banks shall be governed by
pertinent laws.
A bank may, subject to prior approval of the Monetary
Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its
allied undertaking or its investment house units.
A bank authorized to establish branches or other offices
shall be responsible for all business conducted in such
branches and offices to the same extent and in the
same manner as though such business had all been
conducted in the head office. A bank and its branches
and offices shall be treated as one unit.
x x x
SEC. 72. Transacting Business in the Philippines. - The
entry of foreign banks in the Philippines through the
establishment of branches shall be governed by the
provisions of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in the
Philippines shall be governed by the provisions of
Presidential Decree No. 1034, otherwise known as the
"Offshore Banking System Decree."
x x x
SEC. 74. Local Branches of Foreign Banks. - In case of a
foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1)
unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to
refer to such units.
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 a foreign bank
shall have preferential rights to the assets of such
branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign
Banks Liberalization Law, lays down the policies and
regulations specifically concerning the establishment
and operation of local branches of foreign banks.
Relevant provisions of the said statute read'
Sec. 2. Modes of Entry. - The Monetary Board may
authorize foreign banks to operate in the Philippine
banking system through any of the following modes of
entry: (i) by acquiring, purchasing or owning up to sixty
percent (60%) of the voting stock of an existing bank;
(ii) by investing in up to sixty percent (60%) of the
voting stock of a new banking subsidiary incorporated
under the laws of the Philippines; or (iii) by establishing
branches with full banking authority: Provided, That a
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
foreign bank may avail itself of only one (1) mode of
entry: Provided, further, That a foreign bank or a
Philippine corporation may own up to a sixty percent
(60%) of the voting stock of only one (1) domestic bank
or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of
foreign bank branches shall guarantee prompt payment
of all liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the
General Banking Law of 2000 expressly states that the
bank and its branches shall be treated as one unit. It
should be pointed out, however, that the said provision
applies to a universal9 or commercial bank,10 duly
established and organized as a Philippine corporation in
accordance with Section 8 of the same statute,11 and
authorized to establish branches within or outside the
Philippines.
The General Banking Law of 2000, however, does not
make the same categorical statement as regards to
foreign banks and their branches in the Philippines.
What Section 74 of the said law provides is that in case
of a foreign bank with several branches in the
country, all such branches shall be treated as one unit.
As to the relations between the local branches of a
foreign bank and its head office, Section 75 of the
General Banking Law of 2000 and Section 5 of the
Foreign Banks Liberalization Law provide for a "Home
Office Guarantee," in which the head office of the
foreign bank shall guarantee prompt payment of all
liabilities of its Philippine branches. While the Home
Office Guarantee is in accord with the principle that
these local branches, together with its head office,
constitute but one legal entity, it does not necessarily
support the view that said principle is true and
applicable in all circumstances.
The Home Office Guarantee is included in Philippine
statutes clearly for the protection of the interests of the
depositors and other creditors of the local branches of a
foreign bank.12 Since the head office of the bank is
located in another country or state, such a guarantee is
necessary so as to bring the head office within Philippine
jurisdiction, and to hold the same answerable for the
liabilities of its Philippine branches. Hence, the principle
of the singular identity of that the local branches and
the head office of a foreign bank are more often invoked
by the clients in order to establish the accountability of
the head office for the liabilities of its local branches. It
is under such attendant circumstances in which the
American authorities and jurisprudence presented by
petitioners in their Motion for Partial Reconsideration
were rendered.
Now the question that remains to be answered is
whether the foreign bank can use the principle for a
reverse purpose, in order to extend the liability of a
client to the foreign bank's Philippine branch to its head
office, as well as to its branches in other countries.
Thus, if a client obtains a loan from the foreign bank's
Philippine branch, does it absolutely and automatically
make the client a debtor, not just of the Philippine
branch, but also of the head office and all other
branches of the foreign bank around the world? This
Court rules in the negative.
There being a dearth of Philippine authorities and
jurisprudence on the matter, this Court, just as what
128 | P a g e #SJBL
petitioners have done, turns to American authorities and
jurisprudence. American authorities and jurisprudence
are significant herein considering that the head office of
petitioner Citibank is located in New York, United States
of America (U.S.A.).
Unlike Philippine statutes, the American legislation
explicitly defines the relations among foreign branches
of an American bank. Section 25 of the United States
Federal Reserve Act13 states that -
Every national banking association operating foreign
branches shall conduct the accounts of each foreign
branch independently of the accounts of other foreign
branches established by it and of its home office, and
shall at the end of each fiscal period transfer to its
general ledger the profit or loss accrued at each branch
as a separate item.
Contrary to petitioners' assertion that the accounts of
Citibank-Manila and Citibank-Geneva should be deemed
as a single account under its head office, the foregoing
provision mandates that the accounts of foreign
branches of an American bank shall be conducted
independently of each other. Since the head office of
petitioner Citibank is in the U.S.A., then it is bound to
treat its foreign branches in accordance with the said
provision. It is only at the end of its fiscal period that
the bank is required to transfer to its general ledger the
profit or loss accrued at each branch, but still reporting
it as a separate item. It is by virtue of this provision
that the Circuit Court of Appeals of New York declared
in Pan-American Bank and Trust Co. v. National City
Bank of New York14 that a branch is not merely a teller's
window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of
Chartered Bank of India, Australia & China15 are closest
to the one at bar. In said case, the Chartered Bank had
branches in several countries, including one in
Hamburg, Germany and another in New York, U.S.A.,
and yet another in London, United Kingdom. The New
York branch entered in its books credit in favor of four
German firms. Said credit represents collections made
from bills of exchange delivered by the four German
firms. The same four German firms subsequently
became indebted to the Hamburg branch. The London
branch then requested for the transfer of the credit in
the name of the German firms from the New York
branch so as to be applied or setoff against the
indebtedness of the same firms to the Hamburg branch.
One of the question brought before the U.S. District
Court of New York was "whether or not the debts and
the alleged setoffs thereto are mutual," which could be
answered by determining first whether the New York
and Hamburg branches of Chartered Bank are individual
business entities or are one and the same entity. In
denying the right of the Hamburg branch to setoff, the
U.S. District Court ratiocinated that -
The structure of international banking houses such as
Chartered bank defies one rigorous description. Suffice
it to say for present analysis, branches or agencies of
an international bank have been held to be
independent entities for a variety of purposes (a)
deposits payable only at branch where made; Mutaugh
v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693,
269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez,
1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need
be honored only when drawn on branch where
deposited; Chrzanowska v. Corn Exchange Bank, 1916,
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225
N.Y. 728, 122 N.E. 877; subpoena duces tecum on
foreign bank's record barred; In re Harris, D.C.S.D.N.Y.
1939, 27 F. Supp. 480; (d) a foreign branch separate
for collection of forwarded paper; Pan-American Bank
and Trust Company v. National City Bank of New York, 2
Cir., 1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S.
554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is
nothing innately unitary about the organization of
international banking institutions.
Defendant, upon its oral argument and in its brief, relies
heavily on Sokoloff v. National City Bank of New
York,1928, 250 N.Y. 69, 164 N.E. 745, as authority for
the proposition that Chartered Bank, not the Hamburg
or New York Agency, is ultimately responsible for the
amounts owing its German customers and, conversely,
it is to Chartered Bank that the German firms owe their
obligations. The Sokoloff case, aside from its violently
different fact situation, is centered on the legal problem
of default of payment and consequent breach of
contract by a branch bank. It does not stand for the
principle that in every instance an international
bank with branches is but one legal entity for all
purposes. The defendant concedes in its brief (p. 15)
that there are purposes for which the various agencies
and branches of Chartered Bank may be treated in law
as separate entities. I fail to see the applicability
of Sokoloff either as a guide to or authority for the
resolution of this problem. The facts before me and the
cases catalogued supra lend weight to the view that we
are dealing here with Agencies independent of one
another.
x x x contracts of adhesion, because the only participation of
I hold that for instant purposes the Hamburg Agency
and defendant were independent business entities, and
the attempted setoff may not be utilized by defendant
against its debt to the German firms obligated to the
Hamburg Agency.
Going back to the instant Petition, although this Court
concedes that all the Philippine branches of petitioner
Citibank should be treated as one unit with its head
office, it cannot be persuaded to declare that these
Philippine branches are likewise a single unit with the
Geneva branch. It would be stretching the principle way
beyond its intended purpose.
Therefore, this Court maintains its original position in
the Decision that the off-setting or compensation of
respondent's loans with Citibank-Manila using her dollar
accounts with Citibank-Geneva cannot be effected. The
parties cannot be considered principal creditor of the
other. As for the dollar accounts, respondent was the
creditor and Citibank-Geneva was the debtor; and as for
the outstanding loans, petitioner Citibank, particularly
Citibank-Manila, was the creditor and respondent was
the debtor. Since legal compensation was not possible,
petitioner Citibank could only use respondent's dollar
accounts with Citibank-Geneva to liquidate her loans if
she had expressly authorized it to do so by contract.
Respondent cannot be deemed to have authorized the
use of her dollar deposits with Citibank-Geneva to
liquidate her loans with petitioner Citibank when she
signed the PNs16 for her loans which all contained the
provision that -
129 | P a g e #SJBL
At or after the maturity of this note, or when same
becomes due under any of the provisions hereof, any
money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the
undersigned on the books of CITIBANK, N.A. in transit
or in their possession, may without notice be applied at
the discretion of the said bank to the full or partial
payment of this note.
As has been established in the preceding discussion,
"Citibank, N.A." can only refer to the local branches of
petitioner Citibank together with its head office. Unless
there is any showing that respondent understood and
expressly agreed to a more far-reaching interpretation,
the reference to Citibank, N.A. cannot be extended to all
other branches of petitioner Citibank all over the world.
Although theoretically, books of the branches form part
of the books of the head office, operationally and
practically, each branch maintains its own books which
shall only be later integrated and balanced with the
books of the head office. Thus, it is very possible to
identify and segregate the books of the Philippine
branches of petitioner Citibank from those of Citibank-
Geneva, and to limit the authority granted for
application as payment of the PNs to respondent's
deposits in the books of the former.
Moreover, the PNs can be considered a contract of
adhesion, the PNs being in standard printed form
prepared by petitioner Citibank. Generally, stipulations
in a contract come about after deliberate drafting by the
parties thereto, there are certain contracts almost all
the provisions of which have been drafted only by one
party, usually a corporation. Such contracts are called
the party is the affixing of his signature or his
"adhesion" thereto. This being the case, the terms of
such contract are to be construed strictly against the
party which prepared it.17
As for the supposed Declaration of Pledge of
respondent's dollar accounts with Citibank-Geneva as
security for the loans, this Court stands firm on its
ruling that the non-production thereof is fatal to
petitioners' cause in light of respondent's claim that her
signature on such document was a forgery. It bears to
note that the original of the Declaration of Pledge is with
Citibank-Geneva, a branch of petitioner Citibank. As
between respondent and petitioner Citibank, the latter
has better access to the document. The constant excuse
forwarded by petitioner Citibank that Citibank-Geneva
refused to return possession of the original Declaration
of Pledge to Citibank-Manila only supports this Court's
finding in the preceding paragraphs that the two
branches are actually operating separately and
independently of each other.
Further, petitioners keep playing up the fact that
respondent, at the beginning of the trial, refused to give
her specimen signatures to help establish whether her
signature on the Declaration of Pledge was indeed
forged. Petitioners seem to forget that subsequently,
respondent, on advice of her new counsel, already
offered to cooperate in whatever manner so as to bring
the original Declaration of Pledge before the RTC for
inspection. The exchange of the counsels for the
opposing sides during the hearing on 24 July 1991
before the RTC reveals the apparent willingness of
respondent's counsel to undertake whatever course of
action necessary for the production of the contested
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
document, and the evasive, non-committal, and
uncooperative attitude of petitioners' counsel.18
Lastly, this Court's ruling striking down the Declaration
of Pledge is not entirely based on respondent's
allegation of forgery. In its Decision, this Court already
extensively discussed why it found the said Declaration
of Pledge highly suspicious and irregular, to wit'
First of all, it escapes this Court why petitioner Citibank
took care to have the Deeds of Assignment of the PNs
notarized, yet left the Declaration of Pledge unnotarized.
This Court would think that petitioner Citibank would
take greater cautionary measures with the preparation
and execution of the Declaration of Pledge because it
involved respondent's "all present and future fiduciary
placements" with a Citibank branch in another country,
specifically, in Geneva, Switzerland. While there is no
express legal requirement that the Declaration of Pledge
had to be notarized to be effective, even so, it could not
enjoy the same prima facie presumption of due
execution that is extended to notarized documents, and
petitioner Citibank must discharge the burden of proving
due execution and authenticity of the Declaration of
Pledge.
Second, petitioner Citibank was unable to establish the
date when the Declaration of Pledge was actually
executed. The photocopy of the Declaration of Pledge
submitted by petitioner Citibank before the RTC was
undated. It presented only a photocopy of the pledge
because it already forwarded the original copy thereof to
Citibank-Geneva when it requested for the remittance of
respondent's dollar accounts pursuant thereto.
Respondent, on the other hand, was able to secure a
copy of the Declaration of Pledge, certified by an officer
of Citibank-Geneva, which bore the date 24 September
1979. Respondent, however, presented her passport
and plane tickets to prove that she was out of the
country on the said date and could not have signed the
pledge. Petitioner Citibank insisted that the pledge was
signed before 24 September 1979, but could not provide
an explanation as to how and why the said date was
written on the pledge. Although Mr. Tan testified that
the Declaration of Pledge was signed by respondent
personally before him, he could not give the exact date
when the said signing took place. It is important to note
that the copy of the Declaration of Pledge submitted by
the respondent to the RTC was certified by an officer of
Citibank-Geneva, which had possession of the original
copy of the pledge. It is dated 24 September 1979, and
this Court shall abide by the presumption that the
written document is truly dated. Since it is undeniable
that respondent was out of the country on 24
September 1979, then she could not have executed the
pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-
out. The pledge was in a standard printed form. It was
constituted in favor of Citibank, N.A., otherwise referred
to therein as the Bank. It should be noted, however,
that in the space which should have named the pledgor,
the name of petitioner Citibank was typewritten, to wit'
The pledge right herewith constituted shall secure all
claims which the Bank now has or in the future acquires
against Citibank, N.A., Manila (full name and address of
the Debtor), regardless of the legal cause or the
transaction (for example current account, securities
transactions, collections, credits, payments,
documentary credits and collections) which gives rise
130 | P a g e #SJBL
thereto, and including principal, all contractual and
penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and
pledgee being the same entity. Was a mistake made by
whoever filled-out the form? Yes, it could be a
possibility. Nonetheless, considering the value of such a
document, the mistake as to a significant detail in the
pledge could only be committed with gross carelessness
on the part of petitioner Citibank, and raised serious
doubts as to the authenticity and due execution of the
same. The Declaration of Pledge had passed through the
hands of several bank officers in the country and
abroad, yet, surprisingly and implausibly, no one
noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on
the Declaration of Pledge. She claimed that the
signature was a forgery. When a document is assailed
on the basis of forgery, the best evidence rule applies'
Basic is the rule of evidence that when the subject of
inquiry is the contents of a document, no evidence is
admissible other than the original document itself
except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court. Mere photocopies of
documents are inadmissible pursuant to the best
evidence rule. This is especially true when the issue
is that of forgery.
As a rule, forgery cannot be presumed and must be
proved by clear, positive and convincing evidence and
the burden of proof lies on the party alleging forgery.
The best evidence of a forged signature in an
instrument is the instrument itself reflecting the alleged
forged signature. The fact of forgery can only be
established by a comparison between the alleged forged
signature and the authentic and genuine signature of
the person whose signature is theorized upon to have
been forged. Without the original document containing
the alleged forged signature, one cannot make a
definitive comparison which would establish forgery. A
comparison based on a mere xerox copy or reproduction
of the document under controversy cannot produce
reliable results.
Respondent made several attempts to have the original
copy of the pledge produced before the RTC so as to
have it examined by experts. Yet, despite several
Orders by the RTC, petitioner Citibank failed to comply
with the production of the original Declaration of Pledge.
It is admitted that Citibank-Geneva had possession of
the original copy of the pledge. While petitioner Citibank
in Manila and its branch in Geneva may be separate and
distinct entities, they are still incontestably related, and
between petitioner Citibank and respondent, the former
had more influence and resources to convince Citibank-
Geneva to return, albeit temporarily, the original
Declaration of Pledge. Petitioner Citibank did not present
any evidence to convince this Court that it had exerted
diligent efforts to secure the original copy of the pledge,
nor did it proffer the reason why Citibank-Geneva
obstinately refused to give it back, when such document
would have been very vital to the case of petitioner
Citibank. There is thus no justification to allow the
presentation of a mere photocopy of the Declaration of
Pledge in lieu of the original, and the photocopy of the
pledge presented by petitioner Citibank has nil probative
value. In addition, even if this Court cannot make a
categorical finding that respondent's signature on the
original copy of the pledge was forged, it is persuaded
Deposits
CIVIL LAW | C r e d i t T r a n s a c t i o n s
that petitioner Citibank willfully suppressed the
presentation of the original document, and takes into
consideration the presumption that the evidence willfully
suppressed would be adverse to petitioner Citibank if
produced.
As far as the Declaration of Pledge is concerned,
petitioners failed to submit any new evidence or
argument that was not already considered by this Court
when it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva
ordered refunded to respondent
In case petitioners are still ordered to refund to
respondent the amount of her dollar accounts with
Citibank-Geneva, petitioners beseech this Court to
adjust the nominal values of respondent's dollar
accounts and/or her overdue peso loans by using the
values of the currencies stipulated at the time the
obligations were established in 1979, to address the
alleged inequitable consequences resulting from the
extreme and extraordinary devaluation of the Philippine
currency that occurred in the course of the Asian crisis
of 1997. Petitioners base their request on Article 1250
of the Civil Code which reads, "In case an extraordinary
inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code
becomes applicable only when there is extraordinary
inflation or deflation of the currency. Inflation has been
defined as the sharp increase of money or credit or both
without a corresponding increase in business
transaction. There is inflation when there is an increase
in the volume of money and credit relative to available
goods resulting in a substantial and continuing rise in
the general price level.19 In Singson v. Caltex
(Philippines), Inc.,20 this Court already provided a
discourse as to what constitutes as extraordinary
inflation or deflation of currency, thus'
We have held extraordinary inflation to exist when there
is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and
such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the
establishment of the obligation.
An example of extraordinary inflation, as cited by the
Court in Filipino Pipe and Foundry Corporation v.
NAWASA, supra, is that which happened to
the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a
case of hyperinflation. In early 1921, the value of the
German mark was 4.2 to the U.S. dollar. By May of the
same year, it had stumbled to 62 to the U.S. dollar. And
as prices went up rapidly, so that by October 1923, it
had reached 4.2 trillion to the U.S. dollar!" (Bernardo M.
Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).
As reported, "prices were going up every week, then
every day, then every hour. Women were paid several
times a day so that they could rush out and exchange
131 | P a g e #SJBL
their money for something of value before what little
purchasing power was left dissolved in their hands.
Some workers tried to beat the constantly rising prices
by throwing their money out of the windows to their
waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks
and a loaf of bread, billions." (Sidney Rutberg, "The
Money Balloon", New York: Simon and Schuster, 1975,
p. 19, cited in "Economics, An Introduction" by Villegas
& Abola, 3rd ed.)
The supervening of extraordinary inflation is never
assumed. The party alleging it must lay down the
factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged
that the voluminous records and statistics submitted by
plaintiff-appellant proved that there has been a decline
in the purchasing power of the Philippine peso, but this
downward fall cannot be considered "extraordinary" but
was simply a universal trend that has not spared our
country. Similarly, in Huibonhoa v. Court of Appeals, the
Court dismissed plaintiff-appellant's unsubstantiated
allegation that the Aquino assassination in 1983 caused
building and construction costs to double during the
period July 1983 to February 1984. In Serra v. Court of
Appeals, the Court again did not consider the decline in
the peso's purchasing power from 1983 to 1985 to be so
great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case
also raises as basis for the application of Article 1250
the Philippine economic crisis in the early 1980s - - -
when, based on petitioner's evidence, the inflation rate
rose to 50.34% in 1984. We hold that there is no legal
or factual basis to support petitioner's allegation of the
existence of extraordinary inflation during this period,
or, for that matter, the entire time frame of 1968 to
1983, to merit the adjustment of the rentals in the lease
contract dated July 16, 1968. Although by petitioner's
evidence there was a decided decline in the purchasing
power of the Philippine peso throughout this period, we
are hard put to treat this as an "extraordinary inflation"
within the meaning and intent of Article 1250.
Rather, we adopt with approval the following
observations of the Court of Appeals on petitioner's
evidence, especially the NEDA certification of inflation
rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official
inflation rate never exceeded 100% in any single year;
(b) the highest official inflation rate recorded was in
1984 which reached only 50.34%; (c) over a twenty one
(21) year period, the Philippines experienced a single-
digit inflation in ten (10) years (i.e., 1966, 1967, 1968,
1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in
other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979,
1980, 1981, 1982, 1984 and 1989) when the Philippines
experienced double-digit inflation rates, the average of
those rates was only 20.88%; (e) while there was a
decline in the purchasing power of the Philippine
currency from the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal
erosion of the value of the Philippine peso which is a
characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend
of decline in the value of the peso in the past three to
four decades. Unfortunate as this trend may be, it is
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
certainly distinct from the phenomenon contemplated by
Article 1250.
Moreover, this Court has held that the effects of
extraordinary inflation are not to be applied without an
official declaration thereof by competent authorities.
The burden of proving that there had been
extraordinary inflation or deflation of the currency is
upon the party that alleges it. Such circumstance must
be proven by competent evidence, and it cannot be
merely assumed. In this case, petitioners presented no
proof as to how much, for instance, the price index of
goods and services had risen during the intervening
period.21 All the information petitioners provided was
the drop of the U.S. dollar-Philippine peso exchange rate
by 17 points from June 1997 to January 1998. While the
said figure was based on the statistics of the Bangko
Sentral ng Pilipinas (BSP), it is also significant to note
that the BSP did not categorically declare that the same
constitute as an extraordinary inflation. The existence of
extraordinary inflation must be officially proclaimed by
competent authorities, and the only competent authority
so far recognized by this Court to make such an official
proclamation is the BSP.22
Neither can this Court, by merely taking judicial notice
of the Asian currency crisis in 1997, already declare that
there had been extraordinary inflation. It should be
recalled that the Philippines likewise experienced
economic crisis in the 1980s, yet this Court did not find
that extraordinary inflation took place during the said
period so as to warrant the application of Article 1250 of
the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of
the Civil Code is based on equitable considerations.
Among the maxims of equity are (1) he who seeks
equity must do equity, and (2) he who comes into
equity must come with clean hands. The latter is a
frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have
equity.23 Petitioner Citibank, hence, cannot invoke
Article 1250 of the Civil Code because it does not come
to court with clean hands. The delay in the
recovery24 by respondent of her dollar accounts with
Citibank-Geneva was due to the unlawful act of
petitioner Citibank in using the same to liquidate
respondent's loans. Petitioner Citibank even attempted
to justify the off-setting or compensation of
respondent's loans using her dollar accounts with
Citibank-Geneva by the presentation of a highly
suspicious and irregular, and even possibly forged,
Declaration of Pledge.
The damage caused to respondent of the deprivation of
her dollar accounts for more than two decades is
unquestionably relatively more extensive and
devastating, as compared to whatever damage
petitioner Citibank, an international banking corporation
with undoubtedly substantial capital, may have suffered
for respondent's non-payment of her loans. It must also
be remembered that petitioner Citibank had already
considered respondent's loans paid or liquidated by 26
October 1979 after it had fully effected compensation
thereof using respondents deposits and money market
placements. All this time, respondent's dollar accounts
are unlawfully in the possession of and are being used
by petitioner Citibank for its business transactions. In
the meantime, respondent's businesses failed and her
properties were foreclosed because she was denied
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access to her funds when she needed them most.
Taking these into consideration, respondent's dollar
accounts with Citibank-Geneva must be deemed to be
subsisting and continuously deposited with petitioner
Citibank all this while, and will only be presently
withdrawn by respondent. Therefore, petitioner Citibank
should refund to respondent the U.S. $149,632.99
taken from her Citibank-Geneva accounts, or its
equivalent in Philippine currency using the exchange
rate at the time of payment, plus the stipulated
interest for each of the fiduciary placements and current
accounts involved, beginning 26 October 1979.
As to respondent's Motion to Clarify and/or Confirm
Decision with Notice of Judgment
Respondent, in her Motion, is of the mistaken notion
that the Court of Appeals Decision, dated 26 March
2002, as modified by the Resolution of the same court,
dated 20 November 2002, would be implemented or
executed together with this Court's Decision.
This Court clarifies that its affirmation of the Decision of
the Court of Appeals, as modified, is only to the extent
that it recognizes that petitioners had liabilities to the
respondent. However, this Court's Decision modified
that of the appellate court's by making its own
determination of the specific liabilities of the petitioners
to respondent and the amounts thereof; as well as by
recognizing that respondent also had liabilities to
petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only
refer to the dispositive portion of this Court's Decision,
dated 16 October 2006, should it already become final
and executory, without any further modifications.
As the last point, there is no merit in respondent's
Motion for this Court to already declare its Decision,
dated 16 October 2006, final and executory. A judgment
becomes final and executory by operation of law and,
accordingly, the finality of the judgment becomes a fact
upon the lapse of the reglementary period without an
appeal or a motion for new trial or reconsideration being
filed.25 This Court cannot arbitrarily disregard the
reglementary period and declare a judgment final and
executory upon the mere motion of one party, for to do
so will be a culpable violation of the right of the other
parties to due process.
IN VIEW OF THE FOREGOING, petitioners' Motion for
Partial Reconsideration of this Court's Decision, dated 16
October 2006, and respondent's Motion for this Court to
declare the same Decision already final and executory,
are both DENIED for lack of merit.
SO ORDERED.
Endnotes:
1
Penned by Associate Justice Minita V. Chico-Nazario
with Chief Justice Artemio V. Panganiban, Associate
Justices Consuelo Ynares-Santiago, Ma. Alicia Austria-
Martinez, and Romeo J. Callejo, concurring; rollo, Vol.
II, pp. 1897-1898.
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2
Petitioner Investors' Finance Corporation, did business
under the name and style of FNCB Finance. As noted in
the Decision, it is now, by virtue of a merger, doing
business as part of its successor-in-interest, BPI Finance
Corporation. However, the said petitioner shall be
referred to herein as FNCB Finance, consistent with the
reference used in the Decision.
3
"Manila," as used herein, is descriptive of any of the
branches of petitioner Citibank in the Philippines, the
capital of which is the City of Manila. Respondent was
actually dealing with the branch of petitioner Citibank in
Makati City.
4
Penned by Judge Manuel D. Victorio, Records, Vol. III,
pp. 1607-1621.
5
Penned by Associate Justice Andres B. Reyes, Jr. with
Associate Justices Conrado M. Vasquez, Jr. and Amelita
G. Tolentino, concurring; rollo, Vol. I, pp. 365-366.
6
Penned by Associate Justice Andres B. Reyes, Jr. with
Associate Justices Conrado M. Vasquez, Jr. and Amelita
G. Tolentino, concurring; id. at 374.
7
Exhibits "18" to "26," defendants' folder of exhibits,
pp. 83-91.
8
Article 1279 of the Civil Code reads '
ART. 1279. In order that compensation may be proper,
it is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of at the same
kinds, and also of the same quality if the latter has been
stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
9
A universal bank shall have the authority to exercise,
in addition to the powers authorized for a commercial
bank in Section 29, the powers of an investment house
as provided in existing laws and the power to invest in
non-allied enterprises as provided in this Act. (The
General Banking Law of 2000, Section 23)
10
A commercial bank shall have, in addition to the
general powers incident to corporations, all such powers
as may be necessary to carry on the business of
commercial banking, such as accepting drafts and
issuing letters of credit; discounting and negotiating
promissory notes, drafts, bills of exchange, and other
evidence of debt; accepting or creating demand
deposits; receiving other types of deposits and deposit
substitutes; buying and selling foreign exchange and
gold or silver bullion; acquiring marketable bonds and
other debt securities; and extending credit, subject to
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such rules as the Monetary Board may promulgate.
These rules may include the determination of bonds and
other debt securities eligible for investment, the
maturities and aggregate amount of such investment,
the maturities and aggregate amount of investment.
(The General Banking Law of 2000, Section 29)
11
The full text of Section 8 of the General Banking Law
of 2000 is as follows '
SEC. 8. Organization. - The Monetary Board may
authorize the organization of a bank or quasi-bank
subject to the following conditions:
8.1. That the entity is a stock corporation;
8.2. That its funds are obtained from the public, which
shall mean twenty (20) or more persons; and
cralawl ibra ry
8.3. That the minimum capital requirements prescribed
by the Monetary Board for each category of banks are
satisfied.
No new commercial bank shall be established within
three (3) years from the effectivity of this Act. In the
exercise of the authority granted herein, the Monetary
Board shall take into consideration their capability in
terms of their financial resources and technical expertise
and integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership
structure, directors and senior management, its
operating plan and internal controls as well as its
projected financial condition and capital base.
12
See Section 75, the General Banking Law of 2000.
13
12 U.S.C.A., - 604.
14
6 F. 2d 762. (1925); See also Republic of China v.
National City Bank of New York, 208 F. 2d 627 (1954).
15
104 F. Supp. 964 (1952).
16
Supra note 7.
17
BPI Credit Corp. v. Court of Appeals, G.R. No. 96755,
4 December 1991, 204 SCRA 601, 616.
18
See TSN, Vol. XII, 24 July 1991, pp. 30-40.
19
Huibonhoa v. Court of Appeals, 378 Phil. 386, 410
(1999).
20
396 Phil. 245, 253-255 (2000).
21
Sangrador v. Valderrama, G.R. No. L-79552, 29
November 1988, 168 SCRA 215, 228-229.
22
Ramos v. Court of Appeals, G.R. No. 119872, 7 July
1997, 275 SCRA 167, 175.
23
Pilapil v. Garchitorena, G.R. No. 128790, 25
November 1998, 299 SCRA 343, 359; University of the
Philippines v. Hon. Catungal, Jr., G.R. No. 121863, 5
May 1997, 272 SCRA 221, 237.
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24
See Gatlabayan v. Ramirez, 134 Phil. 267, 272
(1968).

25
Munez v. Court of Appeals, G.R. No. L-46010, 23 July
1987, 152 SCRA 197, 201-202, in relation to Section
10, Rule 51 of the revised Rules of Court, which
provides '

SEC. 10. Entry of judgments and final resolutions. - If

no appeal or motion for new trial or reconsideration is
filed within the time provided in these Rules, the
judgment or final resolution shall forthwith be entered
by the clerk in the book of entries of judgments. The
date when the judgment or final resolution becomes
executory shall be deemed as the date of its entry. The
record shall contain the dispositive part of the judgment
or final resolution and shall be signed by the clerk, with
a certificate that such judgment or final resolution has
become final and executory.

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