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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


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
SECOND DIVISION (hereafter, Santos) seek the dismissal of the complaint
filed by the Philippine National Bank (hereafter, PNB), or
[G.R. No. 60705. June 28, 1989.] in the event that they be held liable thereunder, to
revive and affirm that portion of the decision of the trial
INTEGRATED REALTY CORPORATION and RAUL L. court ordering Overseas Bank of Manila (hereafter,
SANTOS, Petitioners, v. PHILIPPINE NATIONAL OBM) to pay IRC and Santos whatever amounts the
BANK, OVERSEAS BANK OF MANILA and THE HON. latter will pay to PNB, with interest from the date of
COURT OF APPEALS, Respondents. payment. 2

[G.R. No. 60907. June 28, 1989.] On the other hand, in G.R. No. 60907, petitioner OBM
challenges the decision of respondent court insofar as it
OVERSEAS BANK OF MANILA, Petitioner, v. COURT holds OBM liable for interest on the time deposit with it
OF APPEALS, INTEGRATED REALTY of Santos corresponding to the period of its closure by
CORPORATION, and RAUL L. order of the Central Bank. 3
SANTOS, Respondents.
In its assailed decision, the respondent Court of
Appeals, quoting from the decision of the lower court, 4
SYLLABUS 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
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NON- trial court as follows:
PERFORMANCE OF OBLIGATIONS; LEGAL INTEREST
chan rob1e s virtual 1aw lib rary

RECOVERABLE FROM DEMAND. — Legal interest, in the Under date 11 January 1967 defendant Raul L. Santos
nature of damages for non-compliance with an made a time deposit with defendant OBM in the amount
obligation to pay a sum of money, is recoverable from of P500,000.00. (Exhibit-10 OBM) and was issued a
the date judicial or extrajudicial demand is made. Certificate of Time Deposit No. 2308 (Exhibit 1-Santos,
Exhibit D). Under date 6 February 1967 defendant Raul
2. ID.; ID.; PARTY NOT PRIVY TO A CONTRACT, NOT L. Santos also made a time deposit with defendant OBM
LIABLE. — We reject the proposition of IRC and Santos in the amount of P200,000.00 (Exhibit 11-OBM) and
that OBM should reimburse them the entire amount was issued certificate of Time Deposit No. 2367 (Exhibit
they may be adjudged to pay PNB. It must be noted 2-Santos, Exhibit E).
that their liability to pay the various interests is an
offshoot of their failure to pay under the terms of the Under date 9 February 1967 defendant IRC, thru its
two promissory notes executed in favor of PNB. OBM President — defendant Raul L. Santos, applied for a loan
was never a party to said promissory notes. There is, and/or credit line (Exhibit A) in the amount of
therefore, no privity of contract between OBM and PNB P700,000.00 with plaintiff bank. To secure the said loan,
which will justify the imposition of the aforesaid defendant Raul L. Santos executed on August 11, 1967
interests upon OBM whose liability should be strictly a Deed of Assignment (Exhibit C) of the two time
confined to and within the provisions of the certificates deposits (Exhibits 1-Santos and 2-Santos, also Exhibits
of time deposit involved in this case. D and E) in favor of plaintiff. Defendant OBM gave its
conformity to the assignment thru letter dated 11
3. ID.; DAMAGES; PARTY IN BAD FAITH LIABLE August 1967 (Exhibit F). On the same date, defendant
THERETO. — IRC and Santos are not without fault. They IRC, thru its President Raul L. Santos, also executed a
likewise acted in bad faith when they refused to comply Deed of Conformity to Loan Conditions (Exhibit G).
with their obligations under the promissory notes, thus
incurring liability for all damages reasonably attributable The defendant OBM, after the due dates of the time
to the non-payment of said obligations. 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).
DECISION 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
REGALADO, J.: 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
In these petitions for review on certiorari, Integrated interest as well as attorney’s fees. It impleaded OBM as
Realty Corporation and Raul Santos (G.R. No. 60705), a defendant to compel it to redeem and pay to it Santos’
and Overseas Bank of Manila (G.R. No. 60907) appeal time deposit certificates with interest, plus exemplary
from the decision of the Court of Appeals, 1 the decretal and corrective damages, attorney’s fees, and costs.
portion of which states:chanrob les vi rtua l lawlib rary

"In their answer to the complaint, IRC and Santos


"WHEREFORE, with the modification that appellee alleged that PNB has no cause of action against them
Overseas Bank of Manila is ordered to pay to the because their obligation to PNB was fully paid or
appellant Raul Santos the sum of P700,000.00 due extinguished upon the ‘irrevocable’ assignment of the

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time deposit certificates, and that they are not


answerable for the insolvency of OBM. They filed a 5. The third-party complaint and cross-claim dismissed;
counterclaim for damages against PNB and a cross-
claim against OBM, alleging that OBM acted fraudulently 6. The defendant Overseas Bank of Manila to pay the
in refusing to pay the time deposit certificates to PNB costs.
resulting in the filing of the suit against them by PNB,
and that, therefore, OBM should pay them whatever SO ORDERED.’" 5
amount they may be ordered by the court to pay PNB
with interest. They also asked that OBM be ordered to IRC, Santos and OBM all appealed to the respondent
pay them compensatory, moral, exemplary and Court of Appeals. As stated in limine, on March 16, 1982
corrective damages. respondent court promulgated its appealed decision,
with a modification and the deletion of that portion of
"In its answer to the complaint, OBM denied knowledge the judgment of the trial court ordering OBM to pay IRC
of the time deposit certificates because the alleged time and Santos whatever amounts they will pay to PNB with
deposit of Santos ‘does not appear’ in its books of interest from the date of payment.
account.
Therein defendants-appellants, through separate
"Whereupon, IRC and Santos, with leave of court, filed a petitions, have brought the said decision to this Court
third-party complaint against Emerito B. Ramos, Jr., for review. cha nrob les vi rtua lawlib rary chan robles .com:cha nro bles.c om.ph

president of OBM, and Rodolfo R. Sunico, treasurer of


said bank, who allegedly received the time deposits of 1. The first issue posed before Us for resolution is
Santos and issued the certificates therefor. whether the liability of IRC ,and Santos with PNB should
be deemed to have been paid by virtue of the deed of
"Answering the third-party complaint, Ramos and assignment made by the former in favor of PNB, which
Sunico alleged that IRC and Santos have no cause of reads:jgc:chan roble s.com.p h

action against them because they received and signed


the time deposit certificates as officers of OBM, that the "KNOW ALL MEN BY THESE PRESENTS;
time deposits are recorded in the subsidiary ledgers of
the bank and are ‘civil liabilities of the defendant OBM.’ I, RAUL L. SANTOS, of legal age, Filipino, with residence
and postal address at 661 Richmond St., Mandaluyong,
"On November 18, 1970, OBM filed an amended or Rizal for and in consideration of certain loans, overdrafts
supplemental answer to the complaint, acknowledging and other credit accommodations granted or those that
the certificates of time deposit that it issued to Santos, may hereafter be granted to me/us by the PHILIPPINE
and admitting its failure to pay the same due to its NATIONAL BANK, have assigned, transferred and
distressed financial situation. As affirmative defenses, it conveyed and by these presents, do hereby assign,
alleged that by reason of its state of insolvency its transfer and convey by way of security unto said
operations have been suspended by the Central Bank PHILIPPINE NATIONAL BANK its successors and assigns
since August 1, 1968; that the time deposits ceased to the following Certificates of Time Deposit issued by the
earn interest from that date; that it may not give OVERSEAS BANK OF MANILA, its CONFORMITY issued
preference to any depositor or creditor; and that on August 11, 1967, hereto enclosed as Annex ‘A’, in
payment of the plaintiff’s claim is prohibited. favor of RAUL L. SANTOS and/or NORA S. SANTOS, in
the aggregate sum of SEVEN HUNDRED THOUSAND
"On January 30, 1976, the lower court rendered PESOS ONLY (P700,000.00), Philippine Currency, . . .
judgment for the plaintiff, the dispositive portion of
which reads as follows: chanro b1es vi rt ual 1aw li bra ry
x x x

‘WHEREFORE, judgment is hereby rendered, ordering:


1aw libra ry
cha nrob 1es vi rtua l

"It is also understood that the herein Assignor/s shall


1. The defendant Integrated Realty Corporation and remain liable for any outstanding balance of his/their
Raul L. Santos to pay the plaintiff, jointly and solidarily, obligation if the Bank is unable to actually receive or
the total amount of P700,000.00 plus interest at the collect the above assigned sums, monies or properties
rate of 9% per annum from maturity dates of the two resulting from any agreements, orders or decisions of
promissory notes on January 11 and February 6, 1968, the court or for any other cause whatsoever." 6
respectively (Exhibits M and I), plus 1-1/ 2% additional
interest effective February 28, 1968 and additional x x x
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 Respondent Court of Appeals did not consider the
paid to the plaintiff; aforesaid assignment as payment, thus: jgc:chanroble s.com.p h

2. The defendants to pay 10% of the amount of "The contention of IRC and Santos that the irrevocable
P700,000.00 as and for attorney’s fees; assignment of the time deposit certificates to PNB
constituted ‘payment’ of their obligation to the latter is
3. The defendant Overseas Bank of Manila to pay cross not well taken.
plaintiffs Integrated Realty Corporation and Raul L.
Santos whatever amounts the latter will pay to the ‘Where a certificate of deposit in a bank, payable at a
plaintiff with interest from date of payment; future day, was handed over by a debtor to his creditor,
it was not payment, unless there was an express
4. The defendant Overseas Bank of Manila to pay cross agreement on the part of the creditor to receive it as
plaintiffs Integrated Realty Corporation and Raul L. such, and the question whether there was or was not
Santos the amount of P10,000.00 as and for attorney’s such an agreement, was one of facts to be decided by
fees; the jury.’ (Downey v. Hicks, 55 U.S. [14 How.] 240 L.

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Ed. 404; See also Michie, Vol. 5B Banks and Banking, p. the theory of an absolute sale for and in consideration of
200)." 7 the same undertaking of Philamgen. There would have
been no necessity for the execution of the indemnity
We uphold respondent court on this score. agreement if the stock assignment was really intended
as an absolute conveyance . . ." cralaw virtua1aw l ib rary

In Lopez v. Court of Appeals, Et Al., 8 petitioner Benito


Lopez obtained a loan for P20,000.00 from the Along the same vein, in the case at bar it would not
Prudential Bank and Trust Company. On the same day, have been necessary on the part of IRC and Santos to
he executed a promissory note in favor of the bank and, execute promissory notes in favor of PNB if the
in addition, he executed a surety bond in which he, as assignment of the time deposits of Santos was really
principal, and Philippine American General Insurance intended as an absolute conveyance.
Co., Inc. (Philamgen), as surety, bound themselves
jointly and severally in favor of the bank for the There are cogent reasons to conclude that the parties
payment of the loan. On the same occasion, Lopez also intended said deed of assignment to complement the
executed in favor of Philamgen an indemnity agreement promissory notes. In declaring that the deed of
whereby he agreed to indemnify the company against assignment did not operate as payment of the loan so
any damages which the latter may sustain in as to extinguish the obligations of IRC and Santos with
consequence of having become a surety upon the bond. PNB, the trial court advanced several valid bases, to
At the same time, Lopez executed a deed of assignment wit:jgc:cha nrob les.co m.ph

of his shares of stock in the Baguio Military Institute,


Inc. in favor of Philamgen. When Lopez’ obligation "a. It is clear from the Deed of Assignment that it was
matured without being settled, Philamgen caused the only by way of security;
transfer of the shares of stocks to its name in order that
it may sell the same and apply the proceeds thereof in x x x
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 "b. The promissory notes (Exhibits H and I) were
Philamgen to pay the bank. Thereafter, Philamgen filed executed on August 16, 1967. If defendants IRC and
an action to recover the amount of the loan against Raul L. Santos, upon executing the Deed of Assignment
Lopez. The trial court therein held that the obligation of on August 11, 1967 had already paid their loan of
Lopez was deemed paid when his shares of stocks were P700,000.00 or otherwise extinguished the same, why
transferred in the name of Philamgen. On appeal, the were the promissory notes made on August 16, 1967
Court of Appeals ruled that Lopez was still liable to still executed by IRC and signed by Raul L. Santos as
Philamgen because, pending payment, Philamgen was President?
merely holding the stock as security for the payment of
Lopez’ obligation. "c. In the application for a credit line (Exhibit A), the
time deposits were offered as collateral." 9
In upholding the finding therein of the Court of Appeals,
We held that: jgc:chan roble s.com.p h
For all intents and purposes, the deed of assignment in
this case is actually a pledge. Adverting again to the
"Notwithstanding the express terms of the ‘Stock Court’s pronouncements in Lopez, supra, we quote
Assignment Separate from Certificate’, however, We therefrom: cra lawnad

hold and rule that the transaction should not be


regarded as an absolute conveyance in view of the "The character of the transaction between the parties is
circumstances obtaining at the time of the execution to be determined by their intention, regardless of what
thereof. language was used or what the form of the transfer
was. If it was intended to secure the payment of money,
"It should be remembered that on June 2, 1959, the day it must be construed as a pledge; but if there was some
Lopez obtained a loan of P20,000.00 from Prudential other intention, it is not a pledge. However, even
Bank, Lopez executed a promissory note for though a transfer, if regarded by itself, appears to have
P20,000.00, plus interest at the rate of ten (10%) per been absolute, its object and character might still be
cent per annum, in favor of said Bank. He likewise qualified and explained by a contemporaneous writing
posted a surety bond to secure his full and faithful declaring it to have been a deposit of the property as
performance of his obligation under the promissory note collateral security. It has been said that a transfer of
with Philamgen as his surety. In return for the property by the debtor to a creditor, even if sufficient on
undertaking of Philamgen under the surety bond, Lopez its face to make an absolute conveyance, should be
executed on the same day not only an indemnity treated as a pledge if the debt continues in existence
agreement but also a stock assignment. and is not discharged by the transfer, and that
accordingly, the use of the terms ordinarily importing
"The indemnity agreement and stock assignment must conveyance, of absolute ownership will not be given that
be considered together as related transactions because effect in such a transaction if they are also commonly
in order to judge the intention of the contracting parties, used in pledges and mortgages and therefore do not
their contemporaneous and subsequent acts shall be unqualifiedly indicate a transfer of absolute ownership,
principally considered. (Article 1371, New Civil Code). in the absence of clear and unambiguous language or
Thus, considering that the indemnity agreement other circumstances excluding an intent to pledge." 10
connotes a continuing obligation of Lopez towards
Philamgen while the stock assignment indicates a The facts and circumstances leading to the execution of
complete discharge of the same obligation, the the deed of assignment, as found by the court a quo
existence of the indemnity agreement whereby Lopez and the respondent court, yield said conclusion that it is
had to pay a premium of P1,000.00 for a period of one in fact a pledge. The deed of assignment has satisfied
year and agreed at all times to indemnify Philamgen of the requirements of a contract of pledge (1) that it be
any and all kinds of losses which the latter might sustain constituted to secure the fulfillment of a principal
by reason of it becoming a surety, is inconsistent with

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obligation; (2) that the pledgor be the absolute owner of subsequent action of the Supreme Court, the stubborn
the thing pledged; (3) that the persons constituting the fact remained that the petitioner was totally crippled
pledge have the free disposal of their property, and in from then on from earning the income needed to meet
the absence thereof, that they be legally authorized for its obligations to its depositors. If such a situation
the purpose. 11 The further requirement that the thing cannot, strictly speaking, be legally denominated as
pledged be placed in the possession of the creditor, or ‘force majeure’, as maintained by private respondent,
of a third person by common agreement 12 was We hold it is a matter of simple equity that it be treated
complied with by the execution of the deed of as such." cralaw virtua 1aw lib rary

assignment in favor of PNB.


The Court further adjured that: jgc:chanro bles.c om.ph

It must also be emphasized that Santos, as assignor,


made an express undertaking that he would remain "Parenthetically, We may add for the guidance of those
liable for any outstanding balance of his obligation who might be concerned, and so that unnecessary
should PNB be unable to actually receive or collect the litigations be avoided from further clogging the dockets
assigned sums resulting from any agreements, orders or of the courts, that in the light of the considerations
decisions of the court or for any other cause expounded in the above opinion, the same formula that
whatsoever. The term "for any cause whatsoever" is exempts petitioner from the payment of interest to its
broad enough to include the situation involved in the depositors during the whole period of factual stoppage
present case. of its operations by orders of the Central Bank, modified
in effect by the decision as well as the approval of a
Under the foregoing circumstances and considerations, formula of rehabilitation by this Court, should be, as a
the unavoidable conclusion is that IRC and Santos matter of consistency, applicable or followed in respect
should be held liable to PNB for the amount of the loan to all other obligations of petitioner which could not be
with the corresponding interest thereon. paid during the period of its actual complete closure." cralaw virt ua1aw li bra ry

2. We find nothing illegal in the interest of one and one- We cannot accept the holding of the respondent Court of
half percent (1-1/2%) imposed by PNB pursuant to the Appeals that the above-cited decisions apply only where
resolution of its Board which presumably was done in the bank is in a state of liquidation. In the very case
accordance with ordinary banking procedures. Not only aforecited, this issue was likewise raised and We
did IRC and Santos fail to overcome the presumption of resolved: jg c:chan roble s.com.p h

regularity of business transactions, but they are likewise


estopped from questioning the validity thereof for the "Thus, Our task is narrowed down to the resolution of
first time in this petition. There is nothing in the records the legal problem of whether or not, for purposes of the
to show that they raised this issue during the trial by payment of the interest here in question, stoppage of
presenting countervailing evidence. What was merely the operations of a bank by a legal order of liquidation
touched upon during the proceedings in the court below may be equated with actual cessation of the bank’s
was the alleged lack of notice to them of the board operation, not different, factually speaking, in its
resolution, but not the veracity or validity thereof. effects, from legal liquidation the factual cessation
having been ordered by the Central Bank.
3. On the issue of whether OBM should be held liable for
interests on the time deposits of IRC and Santos from "In the case of Chinese Grocer’s Association, Et. Al. v.
the time it ceased operations until it resumed its American Apothecaries, 65 Phil. 395, this Court held: jgc:chan robles. com.ph

business, the answer is in the negative.


"As to the second assignment of error, this Court, in
We have held in The Overseas Bank of Manila v. Court G.R. No. 43682, In re Liquidation of the Mercantile Bank
of Appeals and Tony D. Tapia, 13 that: jgc:chanrob les.co m.ph of China, Tan Tiong Tick, claimant and appellant, v.
American Apothecaries, C., Et Al., claimants and
"It is a matter of common knowledge, which We take appellees, through Justice Imperial, held the following:
virtua l 1aw lib rary
chan rob1 es

judicial notice of, that what enables a bank to pay


stipulated interest on money deposited with it is that ‘4. The court held that the appellant is not entitled to
thru the other aspects of its operation it is able to charge interest on the amounts of his claims, and this is
generate funds to cover the payment of such interest. the object of the second assignment of error. Upon this
Unless a bank can lend money, engage in international point a distinction must be made between the interest
transactions, acquire foreclosed mortgaged properties or which the deposits should earn from their existence until
their proceeds and generally engage in other banking the bank ceased to operate, and that which they may
and financing activities from which it can derive income, earn from the time the bank’s operations were stopped
it is inconceivable how it can carry on as a depository until the date of payment of the deposits. As to the first
obligated to pay stipulated interest. Conventional class, we hold that it should be paid because such
wisdom dictates this inexorable fair and just conclusion. interest has been earned in the ordinary course of the
And it can be said that all who deposit money in banks bank’s business and before the latter has been declared
are aware of such a simple economic proposition. in a state of liquidation. Moreover, the bank being
Consequently, it should be deemed read into every authorized by law to make use of the deposits with the
contract of deposit with a bank that the obligation to limitation stated, to invest the same in its business and
pay interest on the deposit ceases the moment the other operations, it may be presumed that it bound
operation of the bank is completely suspended by the itself to pay interest to the depositors as in fact it paid
duly constituted authority, the Central Bank. interest prior to the dates of the said claims. As to the
interest which may be charged from the date the bank
"We consider it of trivial consequence that the stoppage ceased to do business because it was declared in a state
of the bank’s operation by the Central Bank has been of liquidation, we hold that the said interest should not
subsequently declared illegal by the Supreme Court, for be paid.’
before the Court’s order, the bank had no alternative
under the law than to obey the orders of the Central "The Court of Appeals considered this ruling inapplicable
Bank. Whatever be the juridical significance of the

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to the instant case, precisely because, as contended by respectively provided in the contracts. In fine, OBM is
private respondent, the said Apothecaries case had in being required to pay such interest, not as interest
fact in contemplation a valid order of liquidation of the income stipulated in the certificates of time deposit, but
bank concerned, whereas here, the order of the Central as damages for failure and delay in the payment of its
Bank of August 13, 1968 completely forbidding herein obligations which thereby compelled IRC and Santos to
petitioner to do business preparatory to its liquidation resort to the courts.
was first restrained and then nullified by this Supreme
Court. In other words, as far as private respondent is The applicable rule is that legal interest, in the nature of
concerned, it is the legal reason for cessation of damages for non-compliance with an obligation to pay a
operations, not the actual cessation thereof, that sum of money, is recoverable from the date judicial or
matters and is decisive insofar as his right to the extrajudicial demand is made, 20 which latter mode of
continued payment of the interest on his deposit during demand was made by PNB, after the maturity of the
the period of cessation is concerned. certificates of time deposit, on March 1, 1968. 21 The
measure of such damages, there being no stipulation to
"In the light of the peculiar circumstances of this the contrary, shall be the payment of the interest
particular case, We disagree. It is Our considered view, agreed upon in the certificates of deposit 22 which is six
after mature deliberation, that it is utterly unfair to and one-half percent (6-1/2%). Such interest due or
award private respondent his prayer for payment of accrued shall further earn legal interest from the time of
interest on his deposit during the period that petitioner judicial demand. 23
bank was not allowed by the Central Bank to operate."
libra ry
cralaw virtua1aw

We reject the proposition of IRC and Santos that OBM


4. Lastly, IRC and Santos claim that OBM should should reimburse them the entire amount they may be
reimburse them for whatever amounts they may be adjudged to pay PNB. It must be noted that their
adjudged to pay PNB by way of compensation for liability to pay the various interests of nine percent
damages incurred, pursuant to Articles 1170 and 2201 (9%) on the principal obligation, one and one-half
of the Civil Code. percent (1-1/2%) additional interest and one percent
(1%) penalty interest is an offshoot of their failure to
It appears that as early as April, 1967, the financial pay under the terms of the two promissory notes
situation of OBM had already caused mounting concern executed in favor of PNB. OBM was never a party to said
in the Central Bank. 14 On December 5, 1967, new promissory notes. There is, therefore, no privity of
directors and officers drafted from the Central Bank contract between OBM and PNB which will justify the
(CB) itself, the Philippine National Bank (PNB) and the imposition of the aforesaid interests upon OBM whose
Development Bank of the Philippines (DBP) were elected liability should be strictly confined to and within the
and installed and they took over the management and provisions of the certificates of time deposit involved in
control of the Overseas Bank. 15 However, it was only this case. In fact, as noted by respondent court, when
on July 31, 1968 when OBM was excluded from clearing OBM assigned as error that portion of the judgment of
with the CB under Monetary Board Resolution No. 1263. the court a quo requiring OBM to make the disputed
Subsequently, on August 2, 1968, pursuant to reimbursement, IRC and Santos did not dispute that
Resolution No. 1290 of the CB, OBM’s operations were objection of OBM. Besides, IRC and Santos are not
suspended. 16 These CB resolutions were eventually without fault. They likewise acted in bad faith when they
annulled and set aside by this Court on October 4, 1971 refused to comply with their obligations under the
in the decision rendered in the herein cited case of promissory notes, thus incurring liability for all damages
Ramos. chanroble s law lib ra ry
reasonably attributable to the non-payment of said
obligations. 24
Thus, when PNB demanded from OBM payment of the
amounts due on the two time deposits which matured WHEREFORE, judgment is hereby rendered, ordering:
libra ry
cha nrob 1es vi rtua l 1a w

on January 11, 1968 and February 6, 1968,


respectively, there was as yet no obstacle to the faithful 1. Integrated Realty Corporation and Raul L. Santos to
compliance by OBM of its liabilities thereunder. pay Philippine National Bank, jointly and severally, the
Consequently, for having incurred in delay in the total amount of seven hundred thousand pesos
performance of its obligation, OBM should be held liable (P700,000.00), with interest thereon at the rate of nine
for damages. 17 When respondent Santos invested his percent (9%) per annum from the maturity dates of the
money in time deposits with OBM, they entered into a two promissory notes on January 11 and February 6,
contract of simple loan or mutuum, 18 not a contract of 1968, respectively, plus one and one-half percent (1-
deposit. 1/2%) additional interest per annum effective February
28, 1968 and additional penalty interest of one percent
While it is true that under Article 1956 of the Civil Code (1%) per annum of the said amount of seven hundred
no interest shall be due unless it has been expressly thousand pesos (P700,000.00) from the time of
stipulated in writing, this applies only to interest for the maturity of said loan up to the time the said amount of
use of money. It does not comprehend interest paid as seven hundred thousand pesos (P700,000.00) is fully
damages. 19 OBM contends that it had agreed to pay paid to Philippine National Bank.
interest only up to the dates of maturity of the
certificates of time deposit and that respondent Santos 2. Integrated Realty Corporation and Raul L. Santos to
is not entitled to interest after the maturity dates had pay solidarily Philippine National Bank ten percent
expired, unless the contracts are renewed. This is true (10%) of the amount of seven hundred thousand pesos
with respect to the stipulated interest, but the (P700,000.00) as and for attorney’s fees.
obligations consisting as they did in the payment of
money, under Article 1108 of the Civil Code he has the 3. Overseas Bank of Manila to pay Integrated Realty
right to recover damages resulting from the default of Corporation and Raul L. Santos the sum of seven
OBM, and the measure of such damages is interest at hundred thousand pesos (P700,000.00) due under Time
the legal rate of six percent (6%) per annum on the Deposit Certificates Nos. 2308 and 2367, with interest
amounts due and unpaid at the expiration of the periods thereon of six and one-half percent (6-1/2%) per

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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.

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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.
THIRD DIVISION

[G.R. No. L-66826. August 19, 1988.] DECISION


BANK OF THE PHILIPPINE ISLANDS, Petitioner, v.
THE INTERMEDIATE APPELLATE COURT and
RIZALDY T. ZSHORNACK respondents. CORTES, J.:

Pacis & Reyes Law Office for Petitioner.


The original parties to this case were Rizaldy T.
Ernesto T. Zshornack, Jr. for Private Respondent. Zshornack and the Commercial Bank and Trust
Company of the Philippines [hereafter referred to as
"COMTRUST." ] In 1980, the Bank of the Philippine
SYLLABUS 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

1. CIVIL LAW; DEPOSIT; NATURE; CASE AT BAR. — The Rizaldy Zshornack initiated proceedings on June 28,
Commercial Bank and Trust Co. (subsequently absorbed 1976 by filing in the Court of First Instance of Rizal —
by petitioner Bank of the Philippine Islands) through its Caloocan City a complaint against COMTRUST alleging
assistant branch manager for Quezon City four causes of action. Except for the third cause of
acknowledged receipt from the private respondent of action, the CFI ruled in favor of Zshornack. The bank
US$3,000.00 safekeeping. The subsequent acts of the appealed to the Intermediate Appellate Court which
parties also show that the intent of the parties was modified the CFI decision absolving the bank from
really for the bank to safely keep the dollars and to liability on the fourth cause of action. The pertinent
return it to Zshornack at a later time. Thus, Zshornack portions of the judgment, as modified, read:
demanded the return of the money on May 10, 1976, or
c hanrob1es vi rt ual 1aw li bra ry

over five months later. The above arrangement is that IN VIEW OF THE FOREGOING, the Court renders
contract defined under Article 1962, New Civil Code, judgment as follows:
which reads: Art. 1962. A deposit is constituted from
chan rob1e s virtual 1 aw lib rary

the moment a person receives a thing belonging to 1. Ordering the defendant COMTRUST to restore to the
another, with the obligation of safely keeping it and of dollar savings account of plaintiff (No. 25-4109) the
returning the same. If the safekeeping of the thing amount of U.S $1,000.00 as of October 27, 1975 to
delivered is not the principal purpose of the contract, earn interest together with the remaining balance of the
there is no deposit but some other contract. said account at the rate fixed by the bank for dollar
deposits under Central Bank Circular 343;
2. REMEDIAL LAW; ALLEGATIONS IN PLEADINGS;
EFFECT OF FAILURE TO SPECIFICALLY DENY THEREIN 2. Ordering defendant COMTRUST to return to the
THE DUE EXECUTIONS OF DOCUMENTS. — The plaintiff the amount of U.S. $3,000.00 immediately upon
respondent’s second cause of action was based on an the finality of this decision, without interest for the
actionable document. It was therefore incumbent upon reason that the said amount was merely held in custody
the bank to specifically deny under oath the due for safekeeping, but was not actually deposited with the
execution of the document, as prescribed under Rule 8, defendant COMTRUST because being cash currency, it
Section 8, if it desired: (1) to question the authority of cannot by law be deposited with plaintiffs dollar account
Garcia to bind the corporation; and (2) to deny its and defendant’s only obligation is to return the same to
capacity to enter into such contract. No sworn answer plaintiff upon demand;
denying the due execution of the document in question,
or questioning the authority of Garcia to bind the bank,
x x x
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
5. Ordering defendant COMTRUST to pay plaintiff in the
bank’s power, to enter into the contract in question.
amount of P8,000.00 as damages in the concept of
litigation expenses and attorney’s fees suffered by
3. ID.; VOID CONTRACTS; CONTRACTS EXECUTED
plaintiff as a result of the failure of the defendant bank
AGAINST A MANDATORY/PROHIBITORY LAW. — The
to restore to his (plaintiff’s) account the amount of U.S.
mere safekeeping of the greenbacks, without selling
$1,000.00 and to return to him (plaintiff) the U.S.
them to the Central Bank within one business day from
$3,000.00 cash left for safekeeping.
receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls
Costs against defendant COMTRUST.
under the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code, it is void,
SO ORDERED. [Rollo, pp. 47-48.]
having been executed against the provisions of a
mandatory/prohibitory law.
Undaunted, the bank comes to this Court praying that it
be totally absolved from any liability to Zshornack. The
4. ID.; ID.; ID.; EFFECT. — It affords neither of the
latter not having appealed the Court of Appeals
parties a cause of action against the other. "When the

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decision, the issues facing this Court are limited to the As to the second explanation, even if we assume that
bank’s liability with regard to the first and second there was such an agreement, the evidence do not show
causes of action and its liability for damages. that the withdrawal was made pursuant to it. Instead,
the record reveals that the amount withdrawn was used
1. We first consider the first cause of action. to finance a dollar draft in favor of Leovigilda D. Dizon,
and not to fund the current account of the Zshornacks.
On the dates material to this case, Rizaldy Zshornack There is no proof whatsoever that peso Current Account
and his wife, Shirley Gorospe, maintained in No. 210-465-29 was ever credited with the peso
COMTRUST, Quezon City Branch, a dollar savings equivalent of the US$1,000.00 withdrawn on October
account and a peso current account. 27, 1975 from Dollar Savings Account No. 25-4109.

On October 27, 1975, an application for a dollar draft 2. As for the second cause of action, the complaint filed
was accomplished by Virgilio V. Garcia, Assistant Branch with the trial court alleged that on December 8, 1975,
Manager of COMTRUST Quezon City, payable to a Zshornack entrusted to COMTRUST, thru Garcia,
certain Leovigilda D. Dizon in the amount of $1,000.00. US$3,000.00 cash (popularly known as greenbacks) for
In the application, Garcia indicated that the amount was safekeeping, and that the agreement was embodied in a
to be charged to Dollar Savings Acct. No. 25-4109, the document, a copy of which was attached to and made
savings account of the Zshornacks; the charges for part of the complaint. The document reads: chanrob 1es vi rtua l 1aw lib rary

commission, documentary stamp tax and others


totalling P17.46 were to be charged to Current Acct. No. Makati Cable Address: chanrob 1es vi rtua l 1aw lib rary

210-465-29, again, the current account of the


Zshornacks. There was no indication of the name of the Philippines "COMTRUST"
purchaser of the dollar draft.
COMMERCIAL BANK AND TRUST COMPANY
On the same date, October 27, 1975, COMTRUST, under
the signature of Virgilio V. Garcia, issued a check of the Philippines
payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New Quezon City Branch
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 December 8, 1975

When Zshornack noticed the withdrawal of US$1,000.00 MR. RIZALDY T. ZSHORNACK


from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso &/OR MRS. SHIRLEY E. ZSHORNACK
value of the withdrawal was given to Atty. Ernesto
Zshornack, Jr., brother of Rizaldy, on October 27,1975 Sir/Madam: chanrob1e s virtual 1aw l ibra ry

when he (Ernesto) encashed with COMTRUST a cashier’s


check for P8,450.00 issued by the Manila Banking We acknowledged (sic) having received from you today
Corporation payable to Ernesto. the sum of US DOLLARS: THREE THOUSAND ONLY
(US$3,000.00) for safekeeping.
Upon consideration of the foregoing facts, this Court
finds no reason to disturb the ruling of both the trial Received by:(Sgd.)
court and the Appellate Court on the first cause of
action. Petitioner must be held liable for the VIRGILIO V. GARCIA
unauthorized withdrawal of US$1,000.00 from private
respondent’s dollar account. It was also alleged in the complaint that despite
demands, the bank refused to return the money.
In its desperate attempt to justify its act of withdrawing
from its depositor’s savings account, the bank has In its answer, COMTRUST averred that the US$3,000
adopted inconsistent theories. First, it still maintains was credited to Zshornack’s peso current account at
that the peso value of the amount withdrawn was given prevailing conversion rates.
to Atty. Ernesto Zshornack, Jr. when the latter encashed
the Manilabank Cashier’s Check. At the same time, the It must be emphasized that COMTRUST did not deny
bank claims that the withdrawal was made pursuant to specifically under oath the authenticity and due
an agreement where Zshornack allegedly authorized the execution of the above instrument.
bank to withdraw from his dollar savings account such
amount which, when converted to pesos, would be During trial, it was established that on December 8,
needed to fund his peso current account. If indeed the 1975 Zshornack indeed delivered to the bank US$3,000
peso equivalent of the amount withdrawn from the for safekeeping. When he requested the return of the
dollar account was credited to the peso current account, money on May 10, 1976, COMTRUST explained that the
why did the bank still have to pay Ernesto? sum was disposed of in this manner: US$2,000.00 was
sold on December 29, 1975 and the peso proceeds
At any rate, both explanations are unavailing. With amounting to P14,920.00 were deposited to Zshornack’s
regard to the first explanation, petitioner bank has not current account per deposit slip accomplished by Garcia;
shown how the transaction involving the cashier’s check the remaining US$1,000. 00 was sold on February 3,
is related to the transaction involving the dollar draft in 1976 and the peso proceeds amounting to P8,350.00
favor of Dizon financed by the withdrawal from Rizaldy’s were deposited to his current account per deposit slip
dollar account. The two transactions appear entirely also accomplished by Garcia.
independent of each other. Moreover, Ernesto
Zshornack, Jr., possesses a personality distinct and Aside from asserting that the US$3,000.00 was properly
separate from Rizaldy Zshornack. Payment made to credited to Zshornack’s current account at prevailing
Ernesto cannot be considered payment to Rizaldy. chanro bles. com : virt ual law l ibra ry conversion rates, BPI now posits another ground to
defeat private respondent’s claim. It now argues that

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the contract embodied in the document is the contract (1860).] "To say that a corporation has no right to do
of depositum (as defined in Article 1962, New Civil unauthorized acts is only to put forth a very plain
Code), which banks do not enter into. The bank alleges truism; but to say that such bodies have no power or
that Garcia exceeded his powers when he entered into capacity to err is to impute to them an excellence which
the transaction. Hence, it is claimed, the bank cannot be does not belong to any created existence with which we
liable under the contract, and the obligation is purely are acquainted. The distinction between power and right
personal to Garcia.cralawnad is no more to be lost sight of in respect to artificial than
in respect to natural persons." [Ibid.]
Before we go into the nature of the contract entered
into, an important point which arises on the pleadings, Having determined that Garcia’s act of entering into the
must be considered. contract binds the corporation, we now determine the
correct nature of the contract, and its legal
The second cause of action is based on a document consequences, including its enforceability. cha nro bles. com:cra law:red

purporting to be signed by COMTRUST, a copy of which


document was attached to the complaint. In short, the The document which embodies the contract states that
second cause of action was based on an actionable the US$3,000.00 was received by the bank for
document. It was therefore incumbent upon the bank to safekeeping. The subsequent acts of the parties also
specifically deny under oath the due execution of the show that the intent of the parties was really for the
document, as prescribed under Rule 8, Section 8, if it bank to safely keep the dollars and to return it to
desired: (1) to question the authority of Garcia to bind Zshornack at a later time. Thus, Zshornack demanded
the corporation; and (2) to deny its capacity to enter the return of the money on May 10, 1976, or over five
into such contract. [See, E.B. Merchant v. International months later.
Banking Corporation, 6 Phil. 314 (1906).] No sworn
answer denying the due execution of the document in The above arrangement is that contract defined under
question, or questioning the authority of Garcia to bind Article 1962, New Civil Code, which reads: chanrob 1es vi rtua l 1aw lib rary

the bank, or denying the bank’s capacity to enter into


the contract, was ever filed. Hence, the bank is deemed Art. 1962. A deposit is constituted from the moment a
to have admitted not only Garcia’s authority, but also person receives a thing belonging to another, with the
the bank’s power, to enter into the contract in question. obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
In the past, this Court had occasion to explain the the principal purpose of the contract, there is no deposit
reason behind this procedural requirement. but some other contract.

The reason for the rule enunciated in the foregoing Note that the object of the contract between Zshornack
authorities will, we think, be readily appreciated. In and COMTRUST was foreign exchange. Hence, the
dealing with corporations the public at large is bound to transaction was covered by Central Bank Circular No.
rely to a large extent upon outward appearances. If a 20, Restrictions on Gold and Foreign Exchange
man is found acting for a corporation with the external Transactions, promulgated on December 9, 1949, which
indicia of authority, any person, not having notice of was in force at the time the parties entered into the
want of authority, may usually rely upon those transaction involved in this case. The circular provides:
virtua l 1aw lib rary
chan rob1 es

appearances; and if it be found that the directors had


permitted the agent to exercise that authority and x x x
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 2. Transactions in the assets described below and all
it, the corporation will be bound notwithstanding the dealings in them of whatever nature, including, where
actual authority may never have been granted . . . applicable their exportation and importation, shall NOT
Whether a particular officer actually possesses the be effected, except with respect to deposit accounts
authority which he assumes to exercise is frequently included in sub-paragraphs (b) and (c) of this
known to very few, and the proof of it usually is not paragraph, when such deposit accounts are owned by
readily accessible to the stranger who deals with the and in the name of banks.
corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is (a) Any and all assets, provided they are held through,
therefore reasonable in a case where an officer of a in, or with banks or banking institutions located in the
corporation has made a contract in its name, that the Philippines, including money, checks, drafts, bullions,
corporation should be required, if it denies his authority, bank drafts deposit accounts (demand, time and
to state such defense in its answer. By this means the savings), all debts, indebtedness or obligations, financial
plaintiffs apprised of the fact that the agent’s authority brokers and investment houses notes, debentures,
is contested; and he is given an opportunity to adduce stocks, bonds, coupons, bank acceptances, mortgages,
evidence showing either that the authority existed or pledges, liens or other rights in the nature of security,
that the contract was ratified and approved [Ramirez v. expressed in foreign currencies, or if payable abroad,
Orientalist Co. and Fernandez, 38 Phil. 634, 645-646 irrespective of the currency in which they are expressed,
(1918).] and belonging to any person, firm, partnership,
association, branch office, agency, company or other
Petitioner’s argument must also be rejected for another unincorporated body or corporation residing or located
reason. The practical effect of absolving a corporation within the Philippines;
from liability every time an officer enters into a contract
which is beyond corporate powers, even without the (b) Any and all assets of the kinds included and or
proper allegation or proof that the corporation has not described in subparagraph (a) above, whether or not
authorized nor ratified the officer’s act, is to cast held through, in, or with banks or banking institutions,
corporations in so perfect a mold that transgressions and existent within the Philippines, which belong to any
and wrongs by such artificial beings become impossible person, film, partnership, association, branch office,
[Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258

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agency, company or other unincorporated body or full value, nor delay taking ownership thereof except as
corporation not residing or located within the such delay is customary; Provided, That, within one
Philippines; business day upon taking ownership or receiving
payment of foreign exchange the aforementioned
(c) Any and all assets existent within the Philippines persons and entities shall sell such foreign exchange to
including money, checks, drafts, bullions, bank drafts, the authorized agents of the Central Bank.
all debts, indebtedness or obligations, financial
securities commonly dealt in by bankers, brokers and As earlier stated, the document and the subsequent acts
investment houses, notes, debentures, stock, bonds, of the parties show that they intended the bank to
coupons, bank acceptances, mortgages, pledges, liens safekeep the foreign exchange, and return it later to
or other rights in the nature of security expressed in Zshornack, who alleged in his complaint that he is a
foreign currencies, or if payable abroad, irrespective of Philippine resident. The parties did not intended to sell
the currency in which they are expressed, and belonging the US dollars to the Central Bank within one business
to any person, firm, partnership, association, branch day from receipt. Otherwise, the contract of depositum
office, agency, company or other unincorporated body would never have been entered into at all.
or corporation residing or located within the Philippines.
Since the mere safekeeping of the greenbacks, without
x x x 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
4. (a) All receipts of foreign exchange shall be sold daily as one which falls under the general class of prohibited
to the Central Bank by those authorized to deal in transactions. Hence, pursuant to Article 5 of the Civil
foreign exchange. All receipts of foreign exchange by Code, it is void, having been executed against the
any person, firm, partnership, association, branch office, provisions of a mandatory/prohibitory law. More
agency, company or other unincorporated body or importantly, it affords neither of the parties a cause of
corporation shall be sold to the authorized agents of the action against the other. "When the nullity proceeds
Central Bank by the recipients within one business day from the illegality of the cause or object of the contract,
following the receipt of such foreign exchange. Any and the act constitutes a criminal offense, both parties
person, firm, partnership, association, branch office, being in pari delicto, they shall have no cause of action
agency, company or other unincorporated body or against each other . . ." [Art. 1411, New Civil Code.]
corporation, residing or located within the Philippines, The only remedy is one on behalf of the State to
who acquires on and after the date of this Circular prosecute the parties for violating the law.
foreign exchange shall not unless licensed by the
Central Bank, dispose of such foreign exchange in whole We thus rule that Zshornack cannot recover under the
or in part, nor receive less than its full value, nor delay second cause of action.
taking ownership thereof except as such delay is
customary; Provided, further, That within one day upon 3. Lastly, we find the P8,000.00 awarded by the courts
taking ownership, or receiving payment, of foreign a quo as damages in the concept of litigation expenses
exchange the aforementioned persons and entities shall and attorney’s fees to be reasonable. The award is
sell such foreign exchange to designated agents of the sustained. chanroble s law li bra ry : red

Central Bank.
WHEREFORE, the decision appealed from is hereby
x x x MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at
8. Strict observance of the provisions of this Circular is the rate fixed by the bank for dollar savings deposits.
enjoined; and any person, firm or corporation, foreign Petitioner is further ordered to pay private respondent
or domestic, who being bound to the observance the amount of P8,000.00 as damages. The other causes
thereof, or of such other rules, regulations or directives of action of private respondent are ordered dismissed.
as may hereafter be issued in implementation of this
Circular, shall fail or refuse to comply with, or abide by, SO ORDERED.
or shall violate the same, shall be subject to the penal
sanctions provided in the Central Bank Act. Gutierrez, Jr. and Bidin, JJ., concur.

Fernan, C.J., no part — was counsel for Bank of P.I.


x x x
(Cebu).

Feliciano, J., in the result.


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

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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
SECOND DIVISION long as it occurs prior to the filing of the criminal
information in court. (Gonzales v. Serrano (25 SCRA 64,
[G.R. No. 60033. April 4, 1984.] 69 [1968]; Ong v. Court of Appeals, L-058476, 124
SCRA 578, 580-581 [1983]; People v. Nery, 10 SCRA
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, 244 [1964]. In the case at bar, there is no dispute that
and TERESITA SANTOS, Petitioners, v. THE CITY petitioners Guingona and Martin executed a promissory
FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, note on June 17, 1981 assuming the obligation of the
ASST. CITY FISCAL FELIZARDO N. LOTA and bank to private respondent David; while the criminal
CLEMENT DAVID, Respondents. complaint for estafa was filed on December 23, 1981
with the Office of the City Fiscal. Hence, it is clear that
Feliciano C. Tumale, for Petitioners. novation occurred long before the filing of the criminal
complaint with the Office of the City Fiscal.
Asuncion, Gomez & de Leon for Private
Respondents. 4. REMEDIAL LAW; CRIMINAL PROCEDURE; AS A RULE
CRIMINAL PROSECUTION MAY NOT BE SUBJECT OF
The Solicitor General for Respondents. 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
SYLLABUS 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
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; SIMPLE be restrained from further proceeding with the criminal
LOAN; FAILURE OF BANK TO RETURN THE AMOUNT case for to allow the case to continue, even if the
DEPOSITED, NOT A CASE OF ESTAFA. — When private petitioners could have appealed to the Ministry of
respondent David invested his money on time and Justice, would work great injustice to petitioners and
savings deposits with the aforesaid bank, the contract would render meaningless the proper administration of
that was perfected was a contract of simple loan or justice.
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 DECISION
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 MAKASIAR, J.:
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 This is a petition for prohibition and injunction with a
return the amount deposited, it has, however, no prayer for the immediate issuance of restraining order
obligation to return or deliver the same money that was and/or writ of preliminary injunction filed by petitioners
deposited. And, the failure of the Bank to return the on March 26, 1982.
amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. 1(b) On March 31, 1982, by virtue of a court resolution
of the Revised Penal Code, but it will only give rise to issued by this Court on the same date, a temporary
civil liability over which the public respondents have no restraining order was duly issued ordering the
jurisdiction. respondents, their officers, agents, representatives
and/or person or persons acting upon their
2. ID.; ID.; ID.; OBLIGATION OF BANK UNDER (respondents’) orders or in their place or stead to
ORIGINAL TIME AND SAVINGS DEPOSIT IN CASE AT refrain from proceeding with the preliminary
BAR DEEMED NOVATED. — But even granting that the investigation in Case No. 81-31938 of the Office of the
failure of the bank to pay the time and savings deposits City Fiscal of Manila (pp. 47-48, rec.). On January 24,
of private respondent David would constitute a violation 1983, private respondent Clement David filed a motion
of paragraph 1(b) of Article 315 of the Revised Penal to lift restraining order which was denied in the
Code, nevertheless any incipient criminal liability was resolution of this Court dated May 18, 1983.
deemed avoided, because when the aforesaid bank was
placed under receivership by the Central Bank, As can be gleaned from the above, the instant petition
petitioners Guingona and Martin assumed the obligation seeks to prohibit public respondents from proceeding
of the bank to private respondent David, thereby with the preliminary investigation of I.S. No. 81-31938,
resulting in the novation of the original contractual in which petitioners were charged by private respondent
obligation arising from deposit into a contract of loan Clement David, with estafa and violation of Central Bank
and converting the original trust relation between the Circular No. 364 and related regulations regarding
bank and private respondent David into an ordinary foreign exchange transactions principally, on the ground
debtor-creditor relation between the petitioners and of lack of jurisdiction in that the allegations of the
private Respondent. Consequently, the failure of the charged, as well as the testimony of private
bank or petitioners Guingona and Martin to pay the respondent’s principal witness and the evidence through
deposits of private respondent would not constitute a said witness, showed that petitioners’ obligation is civil

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in nature. majority of the stockholders of NSLA had filed Special


Proceedings No. 82-1695 in the Court of First Instance
For purposes of brevity, We hereby adopt the to contest its (NSLA’s) closure; that after NSLA was
antecedent facts narrated by the Solicitor General in its placed under receivership, Martin executed a promissory
Comment dated June 28, 1982, as follows: jgc:chan robles. com.ph 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
"On December 23, 1981, private respondent David filed value of P510,000.00; and, that the liabilities of NSLA to
I.S. No. 81-31938 in the Office of the City Fiscal of David were civil in nature.’
Manila, which case was assigned to respondent Lota for
preliminary investigation (Petition, p. 8). "Petitioner, Guingona, Jr., in his counter-affidavit
(Petition, Annex ‘C’) stated the following: jg c:chan roble s.com.p h

"In I.S. No. 81-31938, David charged petitioners


(together with one Robert Marshall and the following "‘That he had no hand whatsoever in the transactions
directors of the Nation Savings and Loan Association, between David and NSLA since he (Guingona Jr.) had
Inc., namely Homero Gonzales, Juan Merino, Flavio resigned as NSLA president in March 1978, or prior to
Macasaet, Victor Gomez, Jr., Perfecto Mañalac, Jaime V. those transactions; that he assumed a portion of the
Paz, Paulino B. Dionisio, and one John Doe) with estafa liabilities of NSLA to David because of the latter’s
and violation of Central Bank Circular No. 364 and insistence that he placed his investments with NSLA
related Central Bank regulations on foreign exchange because of his faith in Guingona, Jr.; that in a
transactions, allegedly committed as follows (Petition, Promissory Note dated June 17, 1981 (Petition, Annex
Annex ‘A’): jgc:chanrobles. com.ph "D") he (Guingona, Jr.) bound himself to pay David the
sums of P668.307.01 and US$37,500.00 in stated
"‘From March 20, 1979 to March, 1981, David invested installments; that he (Guingona, Jr.) secured payment
with the Nation Savings and Loan Association, of those amounts with second mortgages over two (2)
(hereinafter called NSLA) the sum of P1,145,546.20 on parcels of land under a deed of Second Real Estate
time deposits, P13,531.94 on savings account deposits Mortgage (Petition, Annex" E") in which it was provided
(jointly with his sister, Denise Kuhne), US$10,000.00 on that the mortgage over one (1) parcel shall be cancelled
time deposit, US$15,000.00 under a receipt and upon payment of one half of the obligation to David;
guarantee of payment and US$50,000.00 under a that he (Guingona, Jr.) paid P200,000.00 and tendered
receipt dated June 8, 1980 (all jointly with Denise another P300,000.00 which David refused to accept,
Kuhne), that David was induced into making the hence, he (Guingona, Jr.) filed Civil Case No. Q-33865
aforestated investments by Robert Marshall, an in the Court of First Instance of Rizal at Quezon City, to
Australian national who was allegedly a close associate effect the release of the mortgage over one (1) of the
of petitioner Guingona Jr., then NSLA President, two parcels of land conveyed to David under second
petitioner Martin, then NSLA Executive Vice-President mortgages.’
and petitioner Santos, then NSLA General Manager; that
on March 21, 1981 NSLA was placed under receivership "At the inception of the preliminary investigation before
by the Central Bank, so that David filed claims therewith respondent Lota, petitioners moved to dismiss the
for his investments and those of his sister; that on July charges against them for lack of jurisdiction because
22, 1981 David received a report from the Central Bank David’s claims allegedly comprised a purely civil
that only P305,821.92 of those investments were obligation which was itself novated. Fiscal Lota denied
entered in the records of NSLA; that, therefore, the the motion to dismiss (Petition, p. 8)
respondents in I.S. No. 81-31938 misappropriated the
balance of the investments, at the same time violating "But, after the presentation of David’s principal witness,
Central Bank Circular No. 364 and related Central Bank petitioners filed the instant petition because: (a) the
regulations on foreign exchange transactions; that after production of the Promissory Notes, Banker’s
demands, petitioner Guingona Jr. paid only Acceptance, Certificates of Time Deposits and Savings
P200,000.00, thereby reducing the amounts Account allegedly showed that the transactions between
misappropriated to P959,078.14 and US$75,000.00. David and NSLA were simple loans, i.e., civil obligations
on the part of NSLA which were novated when
"Petitioners, Martin and Santos, filed a joint counter- Guingona, Jr. and Martin assumed them; and (b)
affidavit (Petition, Annex ‘B’) in which they stated the David’s principal witness allegedly testified that the
following:jg c:chan roble s.com. ph duplicate originals of the aforesaid instruments of
indebtedness were all on file with NSLA, contrary to
"‘That Martin became President of NSLA in March 1978 David’s claim that some of his investments were not
(after the resignation of Guingona, Jr.) and served as recorded (Petition, pp. 8-9).
such until October 30, 1980, while Santos was General
Manager up to November 1980; that because NSLA was "Petitioners alleged that they did not exhaust available
urgently in need of funds and at David’s insistence, his administrative remedies because to do so would be
investments were treated as special accounts with futile (Petition, p. 9)" [pp. 153-157, rec.]
interests above the legal rate, and recorded in separate
confidential documents only a portion of which were to As correctly pointed out by the Solicitor General, the
be reported because he did not want the Australian sole issue for resolution is whether public respondents
government to tax his total earnings (nor) to know his acted without jurisdiction when they investigated the
total investments; that all transactions with David were charges (estafa and violation of CB Circular No. 364 and
recorded except the sum of US$15,000.00 which was a related regulations regarding foreign exchange
personal loan of Santos; that David’s check for transactions) subject matter of I.S. No. 81-31938.
US$50,000.00 was cleared through Guingona, Jr.’s
dollar account because NSLA did not have one, that a There is merit in the contention of the petitioners that
draft of US$30,000.00 was placed in the name of one their liability is civil in nature and therefore, public
Paz Roces because of a pending transaction with her; respondents have no jurisdiction over the charge of
that the Philippine Deposit Insurance Corporation had estafa.chanrobles.c om.ph : vi rtual law lib rary

already reimbursed David within the legal limits; that

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A casual perusal of the December 23, 1981 affidavit- Phil. 375; Fletcher American National Bank v. Ang
complaint filed in the Office of the City Fiscal of Manila Cheng Lian, 65 Phil. 385; Pacific Commercial Co. v.
by private respondent David against petitioners Teofisto American Apothecaries Co., 65 Phil. 429; Gopoco
Guingona, Jr., Antonio I. Martin and Teresita G. Santos, Grocery v. Pacific Coast Biscuit Co., 65 Phil. 443)." cralaw virtua1aw l ibra ry

together with one Robert Marshall and the other


directors of the Nation Savings and Loan Association, This Court also declared in the recent case of Serrano v.
will show that from March 20, 1979 to March, 1981, Central Bank of the Philippines (96 SCRA 96, 102
private respondent David, together with his sister, [1980]) that: chanro bles. com.ph : vi rtua l law lib rary

Denise Kuhne, invested with the Nation Savings and


Loan Association the sum of P1,145,546.20 on time "Bank deposits are in the nature of irregular deposits.
deposits covered by Bankers Acceptances and They are really loans because they earn interest. All
Certificates of Time Deposits and the sum of P13,531.94 kinds of bank deposits, whether fixed, savings, or
on savings account deposits covered by passbook nos. current are to be treated as loans and are to be covered
6-632 and 29-742, or a total of P1,159,078.14 (pp. 15- by the law on loans (Art. 1980, Civil Code; Gullas v.
16, rec.). It appears further that private respondent Phil. National Bank, 62 Phil. 519). Current and savings
David, together with his sister, made investments in the deposits are loans to a bank because it can use the
aforesaid bank in the amount of US$75,000.00 (p. 17, same. The petitioner here in making time deposits that
rec.). earn interests with respondent Overseas Bank of Manila
was in reality a creditor of the respondent Bank and not
Moreover, the records reveal that when the aforesaid a depositor. The respondent Bank was in turn a debtor
bank was placed under receivership on March 21, 1981, of petitioner. Failure of the respondent Bank to honor
petitioners Guingona and Martin, upon the request of the time deposit is failure to pay its obligation as a
private respondent David, assumed the obligation of the debtor and not a breach of trust arising from a
bank to private respondent David by executing on June depository’s failure to return the subject matter of the
17, 1981 a joint promissory note in favor of private deposit" (Emphasis supplied).
respondent acknowledging an indebtedness of
P1,336,614.02 and US$75,000.00 (p. 80, rec.). This Hence, the relationship between the private respondent
promissory note was based on the statement of account and the Nation Savings and Loan Association is that of
as of June 30, 1981 prepared by the private respondent creditor and debtor; consequently, the ownership of the
(p. 81, rec.). The amount of indebtedness assumed amount deposited was transmitted to the Bank upon the
appears to be bigger than the original claim because of perfection of the contract and it can make use of the
the added interest and the inclusion of other deposits of amount deposited for its banking operations, such as to
private respondent’s sister in the amount of pay interests on deposits and to pay withdrawals. While
P116,613.20. the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or
Thereafter, or on July 17, 1981, petitioners Guingona deliver the same money that was deposited. And, the
and Martin agreed to divide the said indebtedness, and failure of the Bank to return the amount deposited will
petitioner Guingona executed another promissory note not constitute estafa through misappropriation
antedated to June 17, 1981 whereby he personally punishable under Article 315, par. 1(b) of the Revised
acknowledged an indebtedness of P668,307.01 (1/2 of Penal Code, but it will only give rise to civil liability over
P1,336,614.02) and US$37,500.00 (1/2 of which the public respondents have no jurisdiction.
US$75,000.00) in favor of private respondent (p. 25,
rec.). The aforesaid promissory notes were executed as WE have already laid down the rule that: jgc:chan robles. com.ph

a result of deposits made by Clement David and Denise


Kuhne with the Nation Savings and Loan Association. "In order that a person can be convicted under the
above-quoted provision, it must be proven that he has
Furthermore, the various pleadings and documents filed the obligation to deliver or return the same money,
by private respondent David before this Court goods or personal property that he received. Petitioners
indisputably show that he has indeed invested his had no such obligation to return the same money, i.e.,
money on time and savings deposits with the Nation the bills or coins, which they received from private
Savings and Loan Association. respondents. This is so because as clearly stated in
criminal complaints, the related civil complaints and the
It must be pointed out that when private respondent supporting sworn statements, the sums of money that
David invested his money on time and savings deposits petitioners received were loans.
with the aforesaid bank, the contract that was perfected
was a contract of simple loan or mutuum and not a "The nature of simple loan is defined in Articles 1933
contract of deposit. Thus, Article 1980 of the New Civil and 1953 of the Civil Code.
Code provides that: jgc:chan robles. com.ph

"‘Art. 1933. — By the contract of loan, one of the parties


"Article 1980. Fixed, savings, and current deposits of delivers to another, either something not consumable so
money in banks and similar institutions shall be that the latter may use the same for a certain time and
governed by the provisions concerning simple loan." cralaw virtu a1aw lib rary return it, in which case the contract is called a
commodatum; or money or other consumable thing,
In the case of Central Bank of the Philippines v. Morfe upon the condition that the same amount of the same
(63 SCRA 114, 119 [1975], We said: jgc:chan rob les.com. ph kind and quality shall be paid in which case the contract
is simply called a loan or mutuum.
"It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are "‘Commodatum is essentially gratuitous.
not true deposits. They are considered simple loans and,
as such, are not preferred credits (Art. 1980 Civil Code: "‘Simple loan may be gratuitous or with a stipulation to
In re Liquidation of Mercantile Bank of China: Tan Tiong pay interest.
Tick v. American Apothecaries Co., 65 Phil. 414; Pacific
Coast Biscuit Co. v. Chinese Grocers Association, 65 "‘In commodatum the bailor retains the ownership of

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the thing loaned, while in simple loan, ownership passes whereby criminal liability can be extinguished; hence,
to the borrower. the role of novation may only be to either prevent the
rise of criminal liability or to cast doubt on the true
"‘Art. 1953. — A person who receives a loan of money nature of the original basic transaction, whether or not
or any other fungible thing acquires the ownership it was such that its breach would not give rise to penal
thereof, and is bound to pay to the creditor an equal responsibility, as when money loaned is made to appear
amount of the same kind and quality.’ as a deposit, or other similar disguise is resorted to (cf.
Abeto v. People, 90 Phil. 581; U.S. v. Villareal, 27 Phil.
"It can be readily noted from the above quoted 481)."cralaw virtua1aw li bra ry

provisions that in simple loan (mutuum), as contrasted


to commodatum, the borrower acquires ownership of In the case at bar, there is no dispute that petitioners
the money, goods or personal property borrowed. Being Guingona and Martin executed a promissory note on
the owner, the borrower can dispose of the thing June 17, 1981 assuming the obligation of the bank to
borrowed (Article 248, Civil Code) and his act will not be private respondent David; while the criminal complaint
considered misappropriation thereof" (Yam v. Malik, 94 for estafa was filed on December 23, 1981 with the
SCRA 30, 34 [1979]; Emphasis supplied). Office of the City Fiscal. Hence, it is clear that novation
occurred long before the filing of the criminal complaint
But even granting that the failure of the bank to pay the with the Office of the City Fiscal.
time and savings deposits of private respondent David
would constitute a violation of paragraph 1(b) of Article Consequently, as aforestated, any incipient criminal
315 of the Revised Penal Code, nevertheless any liability would be avoided but there will still be a civil
incipient criminal liability was deemed avoided, because liability on the part of petitioners Guingona and Martin
when the aforesaid bank was placed under receivership to pay the assumed obligation.
by the Central Bank, petitioners Guingona and Martin
assumed the obligation of the bank to private Petitioners herein were likewise charged with violation
respondent David, thereby resulting in the novation of of Section 3 of Central Bank Circular No. 364 and other
the original contractual obligation arising from deposit related regulations regarding foreign exchange
into a contract of loan and converting the original trust transactions by accepting foreign currency deposit in the
relation between the bank and private respondent David amount of US$75,000.00 without authority from the
into an ordinary debtor-creditor relation between the Central Bank. They contend however, that the US
petitioners and private Respondent. Consequently, the dollars intended by respondent David for deposit were
failure of the bank or petitioners Guingona and Martin to all converted into Philippine currency before acceptance
pay the deposits of private respondent would not and deposit into Nation Savings and Loan Association. chanrobles law lib rary

constitute a breach of trust but would merely be a


failure to pay the obligation as a debtor. Petitioners’ contention is worthy of belief for the
following reasons: cha nro b1es vi rtua l 1aw lib ra ry

Moreover, while it is true that novation does not


extinguish criminal liability, it may however, prevent the 1. It appears from the records that when respondent
rise of criminal liability as long as it occurs prior to the David was about to make a deposit of bank draft issued
filing of the criminal information in court. Thus, in in his name in the amount of US$50,000.00 with the
Gonzales v. Serrano (25 SCRA 64, 69 [1968]) We held Nation Savings and Loan Association, the same had to
that: cralawnad be cleared first and converted into Philippine currency.
Accordingly, the bank draft was endorsed by respondent
"As pointed out in People v. Nery, novation prior to the David to petitioner Guingona, who in turn deposited it to
filing of the criminal information — as in the case at bar his dollar account with the Security Bank and Trust
— may convert the relation between the parties into an Company. Petitioner Guingona merely accommodated
ordinary creditor-debtor relation, and place the the request of the Nation Savings and Loan Association
complainant in estoppel to insist on the original in order to clear the bank draft through his dollar
transaction or ‘cast doubt on the true nature’ thereof."
libra ry
cralaw virtu a1aw account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner
Again, in the latest case of Ong v. Court of Appeals (L- Guingona authorized Nation Savings and Loan
58476, 124 SCRA 578, 580-581 [1983]), this Court Association to withdraw the same in order to be utilized
reiterated the ruling in People v. Nery (10 SCRA 244 by the bank for its operations.
[1964]), declaring that: jgc:cha nrob les.com .ph

2. It is safe to assume that the U.S. dollars were


"The novation theory may perhaps apply prior to the converted first into Philippine pesos before they were
filing of the criminal information in court by the state accepted and deposited in Nation Savings and Loan
prosecutors because up to that time the original trust Association, because the bank is presumed to have
relation may be converted by the parties into an followed the ordinary course of the business which is to
ordinary creditor-debtor situation, thereby placing the accept deposits in Philippine currency only, and that the
complainant in estoppel to insist on the original trust. transaction was regular and fair, in the absence of a
But after the justice authorities have taken cognizance clear and convincing evidence to the contrary (see
of the crime and instituted action in court, the offended paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
party may no longer divest the prosecution of its power
to exact the criminal liability, as distinguished from the 3. Respondent David has not denied the aforesaid
civil. The crime being an offense against the state, only contention of herein petitioners despite the fact that it
the latter can renounce it (People v. Gervacio, 54 Off. was raised in petitioners’ reply filed on May 7, 1982 to
Gaz. 2898; People v. Velasco, 42 Phil. 76; U.S. v. private respondent’s comment and in the July 27, 1982
Montañes, 8 Phil. 620). reply to public respondents’ comment and reiterated in
petitioners’ memorandum filed on October 30, 1982,
"It may be observed in this regard that novation is not thereby adding more support to the conclusion that the
one of the means recognized by the Penal Code US$75,000.00 were really converted into Philippine
currency before they were accepted and deposited into

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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

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equity, where to allow the same would defeat a clear


right or permit irremediable injustice.

DECISION

SECOND DIVISION
PUNO, J.:
[G.R. No. 116792. March 29, 1996.]

BANK OF THE PHILIPPINE ISLANDS and GRACE Petitioners seek a review of the Decision 1 of
ROMERO, Petitioners, v. COURT OF APPEALS and respondent Court of Appeals in reversing the Decision 2
EDVIN E. REYES, Respondents. of the Regional Trial Court of Quezon City, Branch 79,
and ordering petitioners to credit private respondent’s
Ricardo R. Gatdula, Jr., for Petitioners. Savings Account No. 3185-0172-56 with P10,556.00
plus interest.
H . D. Tumaneng & Associates Law Office
for Private Respondent. 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
SYLLABUS 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


1. CIVIL LAW; OBLIGATION AND CONTRACTS; Account No. 3185-0128-82 with his grandmother,
EXTINGUISHMENT OF OBLIGATION; COMPENSATION; Emeteria M. Fernandez, opened on February 11, 1986 at
WHEN APPLICABLE. — Compensation shall take place the same BPI branch. He regularly deposited in this
when two persons, in their own right, are creditors and account the U.S. Treasury Warrants payable to the
debtors of each other. Article 1290 of the Civil Code order of Emeteria M. Fernandez as her monthly pension.
provides that "when all the requisites mentioned in
Article 1279 are present, compensation takes effect by Emeteria M. Fernandez died on December 28, 1989
operation of law, and extinguishes both debts to the without the knowledge of the U.S. Treasury
concurrent amount, even though the creditors and Department. She was still sent U.S. Treasury Warrant
debtors are not aware of the compensation. "Legal No. 21667302 dated January 1, 1990 in the amount of
compensation operates even against the will of the U.S. $377.00 3 or P10,556.00. On January 4, 1990,
interested parties and even without the consent of private respondent deposited the said U.S. treasury
them. Since this compensation takes place ipso jure, its check of Fernandez in Savings Account No. 3185-0128-
effects arise on the very day on which all its requisites 82. The U.S. Veterans Administration Office in Manila
concur. When used as a defense, it retroacts to the date conditionally cleared the check. 4 The check was then
when its requisites are fulfilled. sent to the United States for further clearing. 5
2. ID.; ID.; ID.; ID.; ELEMENTS; PRESENT IN CASE AT Two months after or on March 8, 1990, private
BAR. — The elements of legal compensation are all respondent closed Savings Account No. 3185-0128-82
present in the case at bar. The obligors bound and transferred its funds amounting to P13,112.91 to
principally are at the same time creditors of each other. Savings Account No. 3185-0172-56, the joint account
Petitioner bank stands as a debtor of the private with his wife.
respondent, depositor. At the same time, said bank is
the creditor of the private respondent with respect to On January 16, 1991, U.S. Treasury Warrant No.
the dishonored U.S. Treasury Warrant which the latter 21667302 was dishonored as it was discovered that
illegally transferred to his joint account. The debts Fernandez died three (3) days prior to its issuance. The
involves consist of a sum of money. They are due, U.S. Department of Treasury requested petitioner bank
liquidated, and demandable. They are not claimed by a for a refund. 6 For the first time petitioner bank came to
third person. know of the death of Fernandez.
3. ID.; ID.; ID.; ID.; ID.; PRESENCE OF PRIVATE On February 19, 1991, private respondent received a PT
RESPONDENT’S WIFE DOES NOT NEGATE THE ELEMENT & T urgent telegram from petitioner bank requesting
OF MUTUALITY OF PARTIES; CASE AT BAR. — It is true him to contact Manager Grace S. Romero or Assistant
that the joint account of private respondent and his wife Manager When he called up the bank, he was informed
was debited in the case at bar. We hold that the that the treasury check was the subject of a claim by
presence of private respondent’s wife does not negate Citibank NA, correspondent of petitioner bank. He
the element of mutuality of parties, i.e., that they must assured petitioners that he would drop by the bank to
be creditors and debtors of each other in their own look into the matter. He also verbally authorized them
right. The wife of private respondent is not a party in to debit from his other joint account the amount stated
the case at bar. She never asserted any right to the in the dishonored U.S. Treasury Warrant. 7 On the same
debited U.S. Treasury Warrant. Indeed, the right of the day, petitioner bank debited the amount of P10,556.00
petitioner bank to make the debit is clear and cannot be from private respondent’s Savings Account No. 3185-
doubted. To frustrate the application of legal 0172-56.
compensation on the ground that the parties are not all
mutually obligated would result in unjust enrichment on On February 21, 1991, private respondent with his
the part of the private respondent and his wife who lawyer Humphrey Tumaneng visited the petitioner bank
herself out of honesty has not objected to the debit. The and the refund documents were shown to them.
rule as to mutuality is strictly applied at law. But not in Surprisingly, private respondent demanded from

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petitioner bank restitution of the debited amount. He JOINT "AND/OR" ACCOUNT WITH HIS GRANDMOTHER
claimed that because of the debit, he failed to withdraw TO HIS JOINT "AND/OR" ACCOUNT WITH HIS WIFE."
his money when he needed them. He then filed a suit 12
for Damages 8 against petitioners before the Regional
Trial Court of Quezon City, Branch 79. We find merit in the petition.

Petitioners contested the complaint and counter claimed The first issue for resolution is whether private
for moral and exemplary damages. By way of Special respondent verbally authorized petitioner bank to debit
and Affirmative Defense, they averred that private his joint account with his wife for the amount of the
respondent gave them his express verbal authorization returned U.S. Treasury Warrant. We find that petitioners
to debit the questioned amount. They claimed that were able to prove this verbal authority by
private respondent later refused to execute a written preponderance of evidence. The testimonies of Bernardo
authority. 9 and Romero deserve credence. Bernardo testified: cha nrob 1es vi rtual 1aw lib rary

In a Decision dated January 20, 1993, the trial court x x x


dismissed the complaint of private respondent for lack
of cause of action. 10
"Q: After that, what happened?
Private respondent appealed to the respondent Court of
Appeals. On August 16, 1994, the Sixteenth Division of A: . . . Dr. Reyes Called me up and I informed of the
respondent court in AC-G.R. CV No. 41543 reversed the U.S. Treasury Warrant and we are requested to
impugned decision, viz: jgc:c hanro bles. com.ph
reimburse for the amount.

"WHEREFORE, the judgment appealed from is set aside, Q: What was his response if any?
and another one entered ordering defendant (petitioner)
to credit plaintiffs (private respondent’s) S.A. No. 3185- A: Don’t you worry about it, there is no personal
0172-56 with P10,556.00 plus interest at the applicable problem.
rates for express teller savings accounts from February
19, 1991, until compliance herewith. The claim and x x x
counterclaim for damages are dismissed for lack of
merit.
Q: And so what was his response?
SO ORDERED." 11
A: He said that ‘don’t you worry about it’
Petitioners now contend that respondent Court of
Appeals erred:
x x x
cha nro b1es vi rtua l 1aw lib ra ry

"I
Q: You said that you asked him the advice and he did
not answer, what advice are you referring to?
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
NOT HOLDING THAT RESPONDENT REYES GAVE A: In our conversation, he promised me that he will give
EXPRESS AUTHORITY TO PETITIONER BANK TO DEBIT me written confirmation or authorization." 13
HIS JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE
OF THE RETURNED U.S. TREASURY WARRANT. The conversation was promptly relayed to romero who
testified:
chan rob1e s virtual 1aw l ibra ry

II
x x x

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN


NOT HOLDING THAT PETITIONER BANK HAS LEGAL "Q: . . . Was there any opportunity wherein said Mrs.
RIGHT TO APPLY THE DEPOSIT OF RESPONDENT REYES Bernardo was able to convey to you the contents of
TO HIS OUTSTANDING OBLIGATION TO PETITIONER their conversation?
BANK BROUGHT ABOUT BY THE RETURN OF THE U.S.
TREASURY WARRANT HE EARLIER DEPOSITED UNDER A: This was immediately relayed to me as manager of
THE PRINCIPLE OF "LEGAL COMPENSATION." 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?

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN A: Mr. Reyes instructed Mrs. Bernardo to debit his
NOT APPLYING CORRECTLY THE PRINCIPLES account with the bank. His account was maintained
ENUNCIATED BY THE SUPREME COURT IN THE CASE OF jointly with his wife then he promised to drop by to give
GULLAS V. PNB, 62 PHIL 519. us a written confirmation, sir.

IV x x x

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN Q: You said that you authorized the debiting of the
NOT APPRECIATING THE FACT THAT THE MONEY account on February 19, 1991, is that correct?
DEBITED BY PETITIONER BANK WAS THE SAME MONEY
TRANSFERRED BY RESPONDENT REYES FROM HIS A: I did not authorize, we merely followed the

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instruction of Mr. Reyes, sir." 14 that the presence of private respondent’s wife does not
negate the element of mutuality of parties, i.e., that
We are not disposed to believe private respondent’s they must be creditors and debtors of each other in
allegation that he did not give any verbal authorization. their own right. The wife of private respondent is not a
His testimony is uncorroborated. Nor does he inspire party in the case at bar. She never asserted any right to
credence. His past and fraudulent conduct is an the debited U.S. Treasury Warrant. Indeed, the right of
evidence against him. 15 He concealed from petitioner the petitioner bank to make the debit is clear and
bank the death of Fernandez on December 28, 1989. 16 cannot be doubted. To frustrate the application of legal
As of that date, he knew that Fernandez was no longer compensation on the ground that the parties are not all
entitled to receive any pension. Nonetheless, he still mutually obligated would result in unjust enrichment on
received the U.S. Treasury Warrant of Fernandez, and the part of the private respondent and his wife who
on January 4, 1990 deposited the same in Savings herself out of honesty has not objected to the debit. The
Account No. 3185-0128- 82. To pre-empt a refund, rule as to mutuality is strictly applied at law. But not in
private respondent closed his joint account with equity, where to allow the same would defeat right or
Fernandez (Savings Account No. 31-85- 0128-82) on permit irremediable injustice. 22
March 8, 1990 and transferred its balance to his joint
account with his wife (Savings Account No. 3185-0172- IN VIEW HEREOF, the Decision of respondent Court of
56). Worse, private respondent declared under the Appeals in CA-G.R. CV No. 41543 dated August 16,
penalties of perjury in the withdrawal slip 17 dated 1994 is ANNULLED and SET ASIDE and the Decision of
March 8, 1990 that his co-depositor, Fernandez, is still the trial court in Civil Case No. Q-91-8451 dated
living. By his acts, private respondent has stripped January 20, 1993 is REINSTATED. Costs against
himself of credibility. private Respondent.

More importantly, the respondent court erred when it SO ORDERED.


failed to rule that legal compensation is proper.
Compensation shall take place when two persons, in Regalado, Romero and Mendoza, JJ., concur.
their of each other. 18 Article 1290 of the Civil Code
provides that "when all the requisites mentioned in Torres, J., is on leave.
Article 1279 are present, compensation takes effect by
operation of law and, extinguishes both debts to the Endnotes:
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, 1. Sixteenth Division.
its effects arise on the very day on which all its
requisites concur. 20 When used as a defense, it 2. Honorable Godofredo L. Legazpi, Presiding Judge.
retroacts to the date when its requisites are fulfilled. 21
3. Exhibit "6;" Original Records, p. 117.
Article 1279 states that in order that may be proper, it
is necessary:jgc:chan roble s.com.p h
4. TSN of June 17, 1992, pp. 12-14.

"(1) That each one of the obligors be bound principally, 5. TSN of March 27, 1992 p. 14.
and that he be at the same time a principal creditor of
the other; 6. Exhibit "5;" Original Records, p. 116.

(2) That both debts consist in a sum of money, or if the 7. CA Decision, p. 2; Rollo, p. 43.
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been 8. Docketed as Civil Case No. Q-91-8451.
stated;
9. Id., CA Decision, p. 3; Rollo p. 44.
(3) That the two debts be due;
10. RTC Decision, p. 11.
(4) That they be liquidated and demandable;
11. Id., CA Decision, p. 9; Rollo, p. 50.
(5) That over neither of them there be any retention or
controversy, commenced by third persons and 12. Petition, pp. 7-8; Rollo, pp. 26-27.
communicated in due time to the debtor."
13. TSN of January 9, 1992, pp. 9-12.
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 14. TSN of June 17, 1992, pp. 7-8, 23.
same time creditors of each other. Petitioner bank
stands as a debtor of the private respondent, a 15. See People v. Maranion, G.R. Nos. 90672-73, July
depositor. At the same time, said bank is the creditor of 18, 1991, 199 SCRA 421.
the private respondent with respect to the dishonored
U.S. Treasury Warrant which the latter illegally 16. TSN of November 22, 1991, p. 9.
transferred to his joint account. The debts involved
consist of a sum of money. They are due, liquidated, 17. Exhibit "3; n Original Records p. 114.
and demandable. They are not claimed by a third
person. 18. Civil Code, Article 1278.

It is true that the joint account of private respondent 19. Padilla, Ambrosio, Civil Law, Civil Code Annotated,
and his wife was debited in the case at bar. We hold vol. IV, 1987 ed., pp. 612-613.

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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.

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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,
THIRD DIVISION petitioners Citibank, N.A. and FNCB Finance2 filed their
Motion for Partial Reconsideration of the foregoing
[G.R. NO. 156132 : February 6, 2007] Decision on 6 November 2006.

CITIBANK, N.A. (Formerly First National City The facts of the case, as determined by this Court in its
Bank) and INVESTORS' FINANCE CORPORATION, Decision, may be summarized as follows.
doing business under the name and style of FNCB
Finance, Petitioners, v. MODESTA R. Respondent was a client of petitioners. She had several
SABENIANO,Respondent. deposits and market placements with petitioners,
among which were her savings account with the local
RESOLUTION branch of petitioner Citibank (Citibank-Manila3 ); money
market placements with petitioner FNCB Finance; and
dollar accounts with the Geneva branch of petitioner
CHICO-NAZARIO, J.: Citibank (Citibank-Geneva). At the same time,
respondent had outstanding loans with petitioner
On 16 October 2006, this Court promulgated its Citibank, incurred at Citibank-Manila, the principal
Decision1 in the above-entitled case, the dispositive amounts aggregating to P1,920,000.00, all of which had
portion of which reads' become due and demandable by May 1979. Despite
repeated demands by petitioner Citibank, respondent
IN VIEW OF THE FOREGOING, the instant Petition failed to pay her outstanding loans. Thus, petitioner
is PARTLY GRANTED. The assailed Decision of the Citibank used respondent's deposits and money market
Court of Appeals in CA-G.R. No. 51930, dated 26 March placements to off-set and liquidate her outstanding
2002, as already modified by its Resolution, dated 20 obligations, as follows '
November 2002, is hereby AFFIRMED WITH
MODIFICATION, as follows '
Respondent's outstanding obligation (principa
1. PNs No. 23356 and 23357 are DECLARED subsisting and interest as of 26 October 1979)
and outstanding. Petitioner Citibank is ORDERED to
return to respondent the principal amounts of the said Less: Proceeds from respondent's money mar
PNs, amounting to Three Hundred Eighteen Thousand placements with petitioner FNCB Financ
Eight Hundred Ninety-Seven Pesos and Thirty-Four
Centavos (P318,897.34) and Two Hundred Three (principal and interest as of 5 Septembe
Thousand One Hundred Fifty Pesos (P203,150.00), 1979)
respectively, plus the stipulated interest of Fourteen and
a half percent (14.5%) per annum, beginning 17 March Deposits in respondent's bank accounts
1977;
with petitioner Citibank
2. The remittance of One Hundred Forty-Nine Thousand
Six Hundred Thirty Two US Dollars and Ninety-Nine
Proceeds of respondent's money marke
Cents (US$149,632.99) from respondent's Citibank- placements and dollar accounts with
Geneva accounts to petitioner Citibank in Manila, and Citibank-Geneva (peso equivalent as of
the application of the same against respondent's
outstanding loans with the latter, is DECLARED illegal, October 1979)
null and void. Petitioner Citibank is ORDERED to refund
to respondent the said amount, or its equivalent in Balance of respondent's obligation
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, Respondent, however, denied having any outstanding
beginning 26 October 1979; loans with petitioner Citibank. She likewise denied that
she was duly informed of the off-setting or
compensation thereof made by petitioner Citibank using
3. Petitioner Citibank is ORDERED to pay respondent her deposits and money market placements with
moral damages in the amount of Three Hundred petitioners. Hence, respondent sought to recover her
Thousand Pesos (P300,000.00); exemplary damages in deposits and money market placements.
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 Respondent instituted a complaint for "Accounting, Sum
of Money and Damages" against petitioners, docketed
cralawlib rary

as Civil Case No. 11336, before the Regional Trial Court


4. Respondent is ORDERED to pay petitioner Citibank (RTC) of Makati City. After trial proper, which lasted for
the balance of her outstanding loans, which, from the a decade, the RTC rendered a Decision4 on 24 August
respective dates of their maturity to 5 September 1979, 1995, the dispositive portion of which reads'
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.

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WHEREFORE, in view of all the foregoing, decision is (iii) FNCB NNPN Serial No. 05757 (Cancels and
hereby rendered as follows: Supersedes NNPN No. 04952), issued on 02 June
1977, P500,000.00 with 17% interest p.a.;
(1) Declaring as illegal, null and void the setoff effected
by the defendant Bank [petitioner Citibank] of plaintiff's (iv) FNCB NNPN Serial No. 05758 (Cancels and
[respondent Sabeniano] dollar deposit with Citibank, Supersedes NNPN No. 04962), issued on 02 June
Switzerland, in the amount of US$149,632.99, and 1977, P500,000.00 with 17% interest per annum;
ordering the said defendant [petitioner Citibank] to
refund the said amount to the plaintiff with legal interest (v) The Two Million (P2,000,000.00) money market
at the rate of twelve percent (12%) per annum, placements of Ms. Sabeniano with the Ayala Investment
compounded yearly, from 31 October 1979 until fully & Development Corporation (AIDC) with legal interest at
paid, or its peso equivalent at the time of payment; the rate of twelve percent (12%) per annum
compounded yearly, from 30 September 1976 until fully
(2) Declaring the plaintiff [respondent Sabeniano] paid;
indebted to the defendant Bank [petitioner Citibank] in
the amount of P1,069,847.40 as of 5 September 1979 4. Ordering defendants-appellants to jointly and
and ordering the plaintiff [respondent Sabeniano] to pay severally pay the plaintiff-appellant the sum of FIVE
said amount, however, there shall be no interest and HUNDRED THOUSAND PESOS (P500,000.00) by way of
penalty charges from the time the illegal setoff was moral damages, FIVE HUNDRED THOUSAND PESOS
effected on 31 October 1979; (P500,000.00) as exemplary damages, and ONE
HUNDRED THOUSAND PESOS (P100,000.00) as
(3) Dismissing all other claims and counterclaims attorney's fees.
interposed by the parties against each other.
Acting on petitioners' Motion for Partial Reconsideration,
Costs against the defendant Bank. the Court of Appeals issued a Resolution,6 dated 20
November 2002, modifying its earlier Decision, thus'
All the parties appealed the afore-mentioned RTC
Decision to the Court of Appeals, docketed as CA-G.R. WHEREFORE, premises considered, the instant Motion
CV No. 51930. On 26 March 2002, the appellate court for Reconsideration is PARTIALLY GRANTED as Sub-
promulgated its Decision,5 ruling entirely in favor of paragraph (V) paragraph 3 of the
respondent, to wit' assailed Decision's dispositive portion is hereby
ordered DELETED.
Wherefore, premises considered, the assailed 24 August
1995 Decision of the court a quo is hereby AFFIRMED The challenged 26 March 2002 Decision of the Court
with MODIFICATION, as follows: is AFFIRMED with MODIFICATION.

1. Declaring as illegal, null and void the set-off effected Since the Court of Appeals Decision, dated 26 March
by the defendant-appellant Bank of the plaintiff- 2002, as modified by the Resolution of the same court,
appellant's dollar deposit with Citibank, Switzerland, in dated 20 November 2002, was still principally in favor of
the amount of US$149,632.99, and ordering defendant- respondent, petitioners filed the instant Petition for
appellant Citibank to refund the said amount to the Review on Certiorari under Rule 45 of the Revised Rules
plaintiff-appellant with legal interest at the rate of of Court. After giving due course to the instant Petition,
twelve percent (12%) per annum, compounded yearly, this Court promulgated on 16 October 2006 its Decision,
from 31 October 1979 until fully paid, or its peso now subject of petitioners' Motion for Partial
equivalent at the time of payment; Reconsideration. ς ηα ñrοblεš ν ιr†υαl l αω lιb rα rÿ

2. As defendant-appellant Citibank failed to establish by Among the numerous grounds raised by petitioners in
competent evidence the alleged indebtedness of their Motion for Partial Reconsideration, this Court shall
plaintiff-appellant, the set-off of P1,069,847.40 in the address and discuss herein only particular points that
account of Ms. Sabeniano is hereby declared as without had not been considered or discussed in its Decision.
legal and factual basis; Even in consideration of these points though, this Court
remains unconvinced that it should modify or reverse in
3. As defendants-appellants failed to account the any way its disposition of the case in its earlier Decision.
following plaintiff-appellant's money market placements,
savings account and current accounts, the former is As to the off-setting or compensation of respondent's
hereby ordered to return the same, in accordance with outstanding loan balance with her dollar deposits in
the terms and conditions agreed upon by the contending Citibank-Geneva
parties as evidenced by the certificates of investments,
to wit: Petitioners' take exception to the following findings
made by this Court in its Decision, dated 16 October
(i) Citibank NNPN Serial No. 023356 (Cancels and 2006, disallowing the off-setting or compensation of the
Supersedes NNPN No. 22526) issued on 17 March balance of respondent's outstanding loans using her
1977, P318,897.34 with 14.50% interest p.a.; dollar deposits in Citibank-Geneva'

(ii) Citibank NNPN Serial No. 23357 (Cancels and Without the Declaration of Pledge, petitioner Citibank
Supersedes NNPN No. 22528) issued on 17 March had no authority to demand the remittance of
1977, P203,150.00 with 14.50 interest p.a.; 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

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since, petitioner Citibank itself admitted that Citibank- SEC. 20. Bank Branches. - Universal or commercial
Geneva is a distinct and separate entity. As for the banks may open branches or other offices within or
dollar accounts, respondent was the creditor and outside the Philippines upon prior approval of
Citibank-Geneva is the debtor; and as for the the Bangko Sentral.
outstanding loans, petitioner Citibank was the creditor
and respondent was the debtor. The parties in these Branching by all other banks shall be governed by
transactions were evidently not the principal creditor of pertinent laws.
each other.

A bank may, subject to prior approval of the Monetary


Petitioners maintain that respondent's Declaration of Board, use any or all of its branches as outlets for the
Pledge, by virtue of which she supposedly assigned her presentation and/or sale of the financial products of its
dollar accounts with Citibank-Geneva as security for her allied undertaking or its investment house units.
loans with petitioner Citibank, is authentic and, thus,
valid and binding upon respondent. Alternatively,
petitioners aver that even without said Declaration of A bank authorized to establish branches or other offices
Pledge, the off-setting or compensation made by shall be responsible for all business conducted in such
petitioner Citibank using respondent's dollar accounts branches and offices to the same extent and in the
with Citibank-Geneva to liquidate the balance of her same manner as though such business had all been
outstanding loans with Citibank-Manila was expressly conducted in the head office. A bank and its branches
authorized by respondent herself in the promissory and offices shall be treated as one unit.
notes (PNs) she signed for her loans, as well as
sanctioned by Articles 1278 to 1290 of the Civil Code. x x x
This alternative argument is anchored on the premise
that all branches of petitioner Citibank in the Philippines
SEC. 72. Transacting Business in the Philippines. - The
and abroad are part of a single worldwide corporate
entry of foreign banks in the Philippines through the
entity and share the same juridical personality. In
establishment of branches shall be governed by the
connection therewith, petitioners deny that they ever provisions of the Foreign Banks Liberalization Act.
admitted that Citibank-Manila and Citibank-Geneva are
distinct and separate entities.
The conduct of offshore banking business in the
Philippines shall be governed by the provisions of
Petitioners call the attention of this Court to the
Presidential Decree No. 1034, otherwise known as the
following provision found in all of the PNs7 executed by "Offshore Banking System Decree."
respondent for her loans'

x x x
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 SEC. 74. Local Branches of Foreign Banks. - In case of a
whatsoever, on deposit or otherwise, to the credit of the foreign bank which has more than one (1) branch in the
undersigned on the books of CITIBANK, N.A. in transit Philippines, all such branches shall be treated as one (1)
or in their possession, may without notice be applied at unit for the purpose of this Act, and all references to the
the discretion of the said bank to the full or partial Philippine branches of foreign banks shall be held to
payment of this note. refer to such units.

It is the petitioners' contention that the term "Citibank, SEC. 75. Head Office Guarantee. - In order to provide
N.A." used therein should be deemed to refer to all effective protection of the interests of the depositors
branches of petitioner Citibank in the Philippines and and other creditors of Philippine branches of a foreign
abroad; thus, giving petitioner Citibank the authority to bank, the head office of such branches shall fully
apply as payment for the PNs even respondent's dollar guarantee the prompt payment of all liabilities of its
accounts with Citibank-Geneva. Still proceeding from Philippine branch.
the premise that all branches of petitioner Citibank
should be considered as a single entity, then it should Residents and citizens of the Philippines who are
not matter that the respondent obtained the loans from creditors of a branch in the Philippines of a foreign bank
Citibank-Manila and her deposits were with Citibank- shall have preferential rights to the assets of such
Geneva. Respondent should be considered the debtor branch in accordance with existing laws.
(for the loans) and creditor (for her deposits) of the
same entity, petitioner Citibank. Since petitioner
Republic Act No. 7721, otherwise known as the Foreign
Citibank and respondent were principal creditors of each
Banks Liberalization Law, lays down the policies and
other, in compliance with the requirements under Article
regulations specifically concerning the establishment
1279 of the Civil Code,8 then the former could have very
and operation of local branches of foreign banks.
well used off-setting or compensation to extinguish the
Relevant provisions of the said statute read'
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, Sec. 2. Modes of Entry. - The Monetary Board may
"Compensation takes place by operation of law, even authorize foreign banks to operate in the Philippine
though the debts may be payable at different places, banking system through any of the following modes of
but there shall be an indemnity for expenses of entry: (i) by acquiring, purchasing or owning up to sixty
exchange or transportation to the place of payment." 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
Pertinent provisions of Republic Act No. 8791, otherwise
under the laws of the Philippines; or (iii) by establishing
known as the General Banking Law of 2000, governing
branches with full banking authority: Provided, That a
bank branches are reproduced below'

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foreign bank may avail itself of only one (1) mode of petitioners have done, turns to American authorities and
entry: Provided, further, That a foreign bank or a jurisprudence. American authorities and jurisprudence
Philippine corporation may own up to a sixty percent are significant herein considering that the head office of
(60%) of the voting stock of only one (1) domestic bank petitioner Citibank is located in New York, United States
or new banking subsidiary. of America (U.S.A.).

Sec. 5. Head Office Guarantee. - The head office of Unlike Philippine statutes, the American legislation
foreign bank branches shall guarantee prompt payment explicitly defines the relations among foreign branches
of all liabilities of its Philippine branches. of an American bank. Section 25 of the United States
Federal Reserve Act13 states that -
It is true that the afore-quoted Section 20 of the
General Banking Law of 2000 expressly states that the Every national banking association operating foreign
bank and its branches shall be treated as one unit. It branches shall conduct the accounts of each foreign
should be pointed out, however, that the said provision branch independently of the accounts of other foreign
applies to a universal9 or commercial bank,10 duly branches established by it and of its home office, and
established and organized as a Philippine corporation in shall at the end of each fiscal period transfer to its
accordance with Section 8 of the same statute,11 and general ledger the profit or loss accrued at each branch
authorized to establish branches within or outside the as a separate item.
Philippines.
Contrary to petitioners' assertion that the accounts of
The General Banking Law of 2000, however, does not Citibank-Manila and Citibank-Geneva should be deemed
make the same categorical statement as regards to as a single account under its head office, the foregoing
foreign banks and their branches in the Philippines. provision mandates that the accounts of foreign
What Section 74 of the said law provides is that in case branches of an American bank shall be conducted
of a foreign bank with several branches in the independently of each other. Since the head office of
country, all such branches shall be treated as one unit. petitioner Citibank is in the U.S.A., then it is bound to
As to the relations between the local branches of a treat its foreign branches in accordance with the said
foreign bank and its head office, Section 75 of the provision. It is only at the end of its fiscal period that
General Banking Law of 2000 and Section 5 of the the bank is required to transfer to its general ledger the
Foreign Banks Liberalization Law provide for a "Home profit or loss accrued at each branch, but still reporting
Office Guarantee," in which the head office of the it as a separate item. It is by virtue of this provision
foreign bank shall guarantee prompt payment of all that the Circuit Court of Appeals of New York declared
liabilities of its Philippine branches. While the Home in Pan-American Bank and Trust Co. v. National City
Office Guarantee is in accord with the principle that Bank of New York14 that a branch is not merely a teller's
these local branches, together with its head office, window; it is a separate business entity.
constitute but one legal entity, it does not necessarily
support the view that said principle is true and The circumstances in the case of McGrath v. Agency of
applicable in all circumstances. Chartered Bank of India, Australia & China15 are closest
to the one at bar. In said case, the Chartered Bank had
The Home Office Guarantee is included in Philippine branches in several countries, including one in
statutes clearly for the protection of the interests of the Hamburg, Germany and another in New York, U.S.A.,
depositors and other creditors of the local branches of a and yet another in London, United Kingdom. The New
foreign bank.12 Since the head office of the bank is York branch entered in its books credit in favor of four
located in another country or state, such a guarantee is German firms. Said credit represents collections made
necessary so as to bring the head office within Philippine from bills of exchange delivered by the four German
jurisdiction, and to hold the same answerable for the firms. The same four German firms subsequently
liabilities of its Philippine branches. Hence, the principle became indebted to the Hamburg branch. The London
of the singular identity of that the local branches and branch then requested for the transfer of the credit in
the head office of a foreign bank are more often invoked the name of the German firms from the New York
by the clients in order to establish the accountability of branch so as to be applied or setoff against the
the head office for the liabilities of its local branches. It indebtedness of the same firms to the Hamburg branch.
is under such attendant circumstances in which the One of the question brought before the U.S. District
American authorities and jurisprudence presented by Court of New York was "whether or not the debts and
petitioners in their Motion for Partial Reconsideration the alleged setoffs thereto are mutual," which could be
were rendered. answered by determining first whether the New York
and Hamburg branches of Chartered Bank are individual
Now the question that remains to be answered is business entities or are one and the same entity. In
whether the foreign bank can use the principle for a denying the right of the Hamburg branch to setoff, the
reverse purpose, in order to extend the liability of a U.S. District Court ratiocinated that -
client to the foreign bank's Philippine branch to its head
office, as well as to its branches in other countries. The structure of international banking houses such as
Thus, if a client obtains a loan from the foreign bank's Chartered bank defies one rigorous description. Suffice
Philippine branch, does it absolutely and automatically it to say for present analysis, branches or agencies of
make the client a debtor, not just of the Philippine an international bank have been held to be
branch, but also of the head office and all other independent entities for a variety of purposes (a)
branches of the foreign bank around the world? This deposits payable only at branch where made; Mutaugh
Court rules in the negative. v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693,
269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez,
There being a dearth of Philippine authorities and 1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need
jurisprudence on the matter, this Court, just as what be honored only when drawn on branch where
deposited; Chrzanowska v. Corn Exchange Bank, 1916,

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173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 At or after the maturity of this note, or when same
N.Y. 728, 122 N.E. 877; subpoena duces tecum on becomes due under any of the provisions hereof, any
foreign bank's record barred; In re Harris, D.C.S.D.N.Y. money, stocks, bonds, or other property of any kind
1939, 27 F. Supp. 480; (d) a foreign branch separate whatsoever, on deposit or otherwise, to the credit of the
for collection of forwarded paper; Pan-American Bank undersigned on the books of CITIBANK, N.A. in transit
and Trust Company v. National City Bank of New York, 2 or in their possession, may without notice be applied at
Cir., 1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. the discretion of the said bank to the full or partial
554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is payment of this note.
nothing innately unitary about the organization of
international banking institutions. As has been established in the preceding discussion,
"Citibank, N.A." can only refer to the local branches of
Defendant, upon its oral argument and in its brief, relies petitioner Citibank together with its head office. Unless
heavily on Sokoloff v. National City Bank of New there is any showing that respondent understood and
York,1928, 250 N.Y. 69, 164 N.E. 745, as authority for expressly agreed to a more far-reaching interpretation,
the proposition that Chartered Bank, not the Hamburg the reference to Citibank, N.A. cannot be extended to all
or New York Agency, is ultimately responsible for the other branches of petitioner Citibank all over the world.
amounts owing its German customers and, conversely, Although theoretically, books of the branches form part
it is to Chartered Bank that the German firms owe their of the books of the head office, operationally and
obligations. The Sokoloff case, aside from its violently practically, each branch maintains its own books which
different fact situation, is centered on the legal problem shall only be later integrated and balanced with the
of default of payment and consequent breach of books of the head office. Thus, it is very possible to
contract by a branch bank. It does not stand for the identify and segregate the books of the Philippine
principle that in every instance an international branches of petitioner Citibank from those of Citibank-
bank with branches is but one legal entity for all Geneva, and to limit the authority granted for
purposes. The defendant concedes in its brief (p. 15) application as payment of the PNs to respondent's
that there are purposes for which the various agencies deposits in the books of the former.
and branches of Chartered Bank may be treated in law
as separate entities. I fail to see the applicability Moreover, the PNs can be considered a contract of
of Sokoloff either as a guide to or authority for the adhesion, the PNs being in standard printed form
resolution of this problem. The facts before me and the prepared by petitioner Citibank. Generally, stipulations
cases catalogued supra lend weight to the view that we in a contract come about after deliberate drafting by the
are dealing here with Agencies independent of one parties thereto, there are certain contracts almost all
another. the provisions of which have been drafted only by one
party, usually a corporation. Such contracts are called
x x x contracts of adhesion, because the only participation of
the party is the affixing of his signature or his
I hold that for instant purposes the Hamburg Agency "adhesion" thereto. This being the case, the terms of
and defendant were independent business entities, and such contract are to be construed strictly against the
the attempted setoff may not be utilized by defendant party which prepared it.17
against its debt to the German firms obligated to the
Hamburg Agency. As for the supposed Declaration of Pledge of
respondent's dollar accounts with Citibank-Geneva as
Going back to the instant Petition, although this Court security for the loans, this Court stands firm on its
concedes that all the Philippine branches of petitioner ruling that the non-production thereof is fatal to
Citibank should be treated as one unit with its head petitioners' cause in light of respondent's claim that her
office, it cannot be persuaded to declare that these signature on such document was a forgery. It bears to
Philippine branches are likewise a single unit with the note that the original of the Declaration of Pledge is with
Geneva branch. It would be stretching the principle way Citibank-Geneva, a branch of petitioner Citibank. As
beyond its intended purpose. between respondent and petitioner Citibank, the latter
has better access to the document. The constant excuse
forwarded by petitioner Citibank that Citibank-Geneva
Therefore, this Court maintains its original position in refused to return possession of the original Declaration
the Decision that the off-setting or compensation of of Pledge to Citibank-Manila only supports this Court's
respondent's loans with Citibank-Manila using her dollar finding in the preceding paragraphs that the two
accounts with Citibank-Geneva cannot be effected. The branches are actually operating separately and
parties cannot be considered principal creditor of the independently of each other.
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 Further, petitioners keep playing up the fact that
Citibank-Manila, was the creditor and respondent was respondent, at the beginning of the trial, refused to give
the debtor. Since legal compensation was not possible, her specimen signatures to help establish whether her
petitioner Citibank could only use respondent's dollar signature on the Declaration of Pledge was indeed
accounts with Citibank-Geneva to liquidate her loans if forged. Petitioners seem to forget that subsequently,
she had expressly authorized it to do so by contract. 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
Respondent cannot be deemed to have authorized the inspection. The exchange of the counsels for the
use of her dollar deposits with Citibank-Geneva to opposing sides during the hearing on 24 July 1991
liquidate her loans with petitioner Citibank when she before the RTC reveals the apparent willingness of
signed the PNs16 for her loans which all contained the respondent's counsel to undertake whatever course of
provision that - action necessary for the production of the contested

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document, and the evasive, non-committal, and thereto, and including principal, all contractual and
uncooperative attitude of petitioners' counsel.18 penalty interest, commissions, charges, and costs.

Lastly, this Court's ruling striking down the Declaration The pledge, therefore, made no sense, the pledgor and
of Pledge is not entirely based on respondent's pledgee being the same entity. Was a mistake made by
allegation of forgery. In its Decision, this Court already whoever filled-out the form? Yes, it could be a
extensively discussed why it found the said Declaration possibility. Nonetheless, considering the value of such a
of Pledge highly suspicious and irregular, to wit' document, the mistake as to a significant detail in the
pledge could only be committed with gross carelessness
First of all, it escapes this Court why petitioner Citibank on the part of petitioner Citibank, and raised serious
took care to have the Deeds of Assignment of the PNs doubts as to the authenticity and due execution of the
notarized, yet left the Declaration of Pledge unnotarized. same. The Declaration of Pledge had passed through the
This Court would think that petitioner Citibank would hands of several bank officers in the country and
take greater cautionary measures with the preparation abroad, yet, surprisingly and implausibly, no one
and execution of the Declaration of Pledge because it noticed such a glaring mistake.
involved respondent's "all present and future fiduciary
placements" with a Citibank branch in another country, Lastly, respondent denied that it was her signature on
specifically, in Geneva, Switzerland. While there is no the Declaration of Pledge. She claimed that the
express legal requirement that the Declaration of Pledge signature was a forgery. When a document is assailed
had to be notarized to be effective, even so, it could not on the basis of forgery, the best evidence rule applies'
enjoy the same prima facie presumption of due
execution that is extended to notarized documents, and Basic is the rule of evidence that when the subject of
petitioner Citibank must discharge the burden of proving inquiry is the contents of a document, no evidence is
due execution and authenticity of the Declaration of admissible other than the original document itself
Pledge. except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court. Mere photocopies of
Second, petitioner Citibank was unable to establish the documents are inadmissible pursuant to the best
date when the Declaration of Pledge was actually evidence rule. This is especially true when the issue
executed. The photocopy of the Declaration of Pledge is that of forgery.
submitted by petitioner Citibank before the RTC was
undated. It presented only a photocopy of the pledge As a rule, forgery cannot be presumed and must be
because it already forwarded the original copy thereof to proved by clear, positive and convincing evidence and
Citibank-Geneva when it requested for the remittance of the burden of proof lies on the party alleging forgery.
respondent's dollar accounts pursuant thereto. The best evidence of a forged signature in an
Respondent, on the other hand, was able to secure a instrument is the instrument itself reflecting the alleged
copy of the Declaration of Pledge, certified by an officer forged signature. The fact of forgery can only be
of Citibank-Geneva, which bore the date 24 September established by a comparison between the alleged forged
1979. Respondent, however, presented her passport signature and the authentic and genuine signature of
and plane tickets to prove that she was out of the the person whose signature is theorized upon to have
country on the said date and could not have signed the been forged. Without the original document containing
pledge. Petitioner Citibank insisted that the pledge was the alleged forged signature, one cannot make a
signed before 24 September 1979, but could not provide definitive comparison which would establish forgery. A
an explanation as to how and why the said date was comparison based on a mere xerox copy or reproduction
written on the pledge. Although Mr. Tan testified that of the document under controversy cannot produce
the Declaration of Pledge was signed by respondent reliable results.
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 Respondent made several attempts to have the original
the respondent to the RTC was certified by an officer of copy of the pledge produced before the RTC so as to
Citibank-Geneva, which had possession of the original have it examined by experts. Yet, despite several
copy of the pledge. It is dated 24 September 1979, and Orders by the RTC, petitioner Citibank failed to comply
this Court shall abide by the presumption that the with the production of the original Declaration of Pledge.
written document is truly dated. Since it is undeniable It is admitted that Citibank-Geneva had possession of
that respondent was out of the country on 24 the original copy of the pledge. While petitioner Citibank
September 1979, then she could not have executed the in Manila and its branch in Geneva may be separate and
pledge on the said date. distinct entities, they are still incontestably related, and
between petitioner Citibank and respondent, the former
had more influence and resources to convince Citibank-
Third, the Declaration of Pledge was irregularly filled- Geneva to return, albeit temporarily, the original
out. The pledge was in a standard printed form. It was Declaration of Pledge. Petitioner Citibank did not present
constituted in favor of Citibank, N.A., otherwise referred any evidence to convince this Court that it had exerted
to therein as the Bank. It should be noted, however, diligent efforts to secure the original copy of the pledge,
that in the space which should have named the pledgor, nor did it proffer the reason why Citibank-Geneva
the name of petitioner Citibank was typewritten, to wit' obstinately refused to give it back, when such document
would have been very vital to the case of petitioner
The pledge right herewith constituted shall secure all Citibank. There is thus no justification to allow the
claims which the Bank now has or in the future acquires presentation of a mere photocopy of the Declaration of
against Citibank, N.A., Manila (full name and address of Pledge in lieu of the original, and the photocopy of the
the Debtor), regardless of the legal cause or the pledge presented by petitioner Citibank has nil probative
transaction (for example current account, securities value. In addition, even if this Court cannot make a
transactions, collections, credits, payments, categorical finding that respondent's signature on the
documentary credits and collections) which gives rise original copy of the pledge was forged, it is persuaded

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that petitioner Citibank willfully suppressed the their money for something of value before what little
presentation of the original document, and takes into purchasing power was left dissolved in their hands.
consideration the presumption that the evidence willfully Some workers tried to beat the constantly rising prices
suppressed would be adverse to petitioner Citibank if by throwing their money out of the windows to their
produced. waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks
As far as the Declaration of Pledge is concerned, and a loaf of bread, billions." (Sidney Rutberg, "The
petitioners failed to submit any new evidence or Money Balloon", New York: Simon and Schuster, 1975,
argument that was not already considered by this Court p. 19, cited in "Economics, An Introduction" by Villegas
when it rendered its Decision. & Abola, 3rd ed.)

As to the value of the dollar deposits in Citibank-Geneva The supervening of extraordinary inflation is never
ordered refunded to respondent assumed. The party alleging it must lay down the
factual basis for the application of Article 1250.

In case petitioners are still ordered to refund to


respondent the amount of her dollar accounts with Thus, in the Filipino Pipe case, the Court acknowledged
Citibank-Geneva, petitioners beseech this Court to that the voluminous records and statistics submitted by
adjust the nominal values of respondent's dollar plaintiff-appellant proved that there has been a decline
accounts and/or her overdue peso loans by using the in the purchasing power of the Philippine peso, but this
values of the currencies stipulated at the time the downward fall cannot be considered "extraordinary" but
obligations were established in 1979, to address the was simply a universal trend that has not spared our
alleged inequitable consequences resulting from the country. Similarly, in Huibonhoa v. Court of Appeals, the
extreme and extraordinary devaluation of the Philippine Court dismissed plaintiff-appellant's unsubstantiated
currency that occurred in the course of the Asian crisis allegation that the Aquino assassination in 1983 caused
of 1997. Petitioners base their request on Article 1250 building and construction costs to double during the
of the Civil Code which reads, "In case an extraordinary period July 1983 to February 1984. In Serra v. Court of
inflation or deflation of the currency stipulated should Appeals, the Court again did not consider the decline in
supervene, the value of the currency at the time of the the peso's purchasing power from 1983 to 1985 to be so
establishment of the obligation shall be the basis of great as to result in an extraordinary inflation.
payment, unless there is an agreement to the contrary."
Like the Serra and Huibonhoa cases, the instant case
It is well-settled that Article 1250 of the Civil Code also raises as basis for the application of Article 1250
becomes applicable only when there is extraordinary the Philippine economic crisis in the early 1980s - - -
inflation or deflation of the currency. Inflation has been when, based on petitioner's evidence, the inflation rate
defined as the sharp increase of money or credit or both rose to 50.34% in 1984. We hold that there is no legal
without a corresponding increase in business or factual basis to support petitioner's allegation of the
transaction. There is inflation when there is an increase existence of extraordinary inflation during this period,
in the volume of money and credit relative to available or, for that matter, the entire time frame of 1968 to
goods resulting in a substantial and continuing rise in 1983, to merit the adjustment of the rentals in the lease
the general price level.19 In Singson v. Caltex contract dated July 16, 1968. Although by petitioner's
(Philippines), Inc.,20 this Court already provided a evidence there was a decided decline in the purchasing
discourse as to what constitutes as extraordinary power of the Philippine peso throughout this period, we
inflation or deflation of currency, thus' are hard put to treat this as an "extraordinary inflation"
within the meaning and intent of Article 1250.

We have held extraordinary inflation to exist when there


is a decrease or increase in the purchasing power of the Rather, we adopt with approval the following
Philippine currency which is unusual or beyond the observations of the Court of Appeals on petitioner's
common fluctuation in the value of said currency, and evidence, especially the NEDA certification of inflation
such increase or decrease could not have been rates based on consumer price index:
reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the xxx (a) from the period 1966 to 1986, the official
establishment of the obligation. inflation rate never exceeded 100% in any single year;
(b) the highest official inflation rate recorded was in
An example of extraordinary inflation, as cited by the 1984 which reached only 50.34%; (c) over a twenty one
Court in Filipino Pipe and Foundry Corporation v. (21) year period, the Philippines experienced a single-
NAWASA, supra, is that which happened to digit inflation in ten (10) years (i.e., 1966, 1967, 1968,
the deutschmark in 1920. Thus: 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
"More recently, in the 1920s, Germany experienced a experienced double-digit inflation rates, the average of
case of hyperinflation. In early 1921, the value of the those rates was only 20.88%; (e) while there was a
German mark was 4.2 to the U.S. dollar. By May of the decline in the purchasing power of the Philippine
same year, it had stumbled to 62 to the U.S. dollar. And currency from the period 1966 to 1986, such cannot be
as prices went up rapidly, so that by October 1923, it considered as extraordinary; rather, it is a normal
had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. erosion of the value of the Philippine peso which is a
Villegas & Victor R. Abola, Economics, An characteristic of most currencies.
Introduction [Third Edition]).

"Erosion" is indeed an accurate description of the trend


As reported, "prices were going up every week, then of decline in the value of the peso in the past three to
every day, then every hour. Women were paid several four decades. Unfortunate as this trend may be, it is
times a day so that they could rush out and exchange

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certainly distinct from the phenomenon contemplated by access to her funds when she needed them most.
Article 1250. Taking these into consideration, respondent's dollar
accounts with Citibank-Geneva must be deemed to be
Moreover, this Court has held that the effects of subsisting and continuously deposited with petitioner
extraordinary inflation are not to be applied without an Citibank all this while, and will only be presently
official declaration thereof by competent authorities. withdrawn by respondent. Therefore, petitioner Citibank
should refund to respondent the U.S. $149,632.99
taken from her Citibank-Geneva accounts, or its
The burden of proving that there had been equivalent in Philippine currency using the exchange
extraordinary inflation or deflation of the currency is rate at the time of payment, plus the stipulated
upon the party that alleges it. Such circumstance must interest for each of the fiduciary placements and current
be proven by competent evidence, and it cannot be accounts involved, beginning 26 October 1979.
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 As to respondent's Motion to Clarify and/or Confirm
period.21 All the information petitioners provided was Decision with Notice of Judgment
the drop of the U.S. dollar-Philippine peso exchange rate
by 17 points from June 1997 to January 1998. While the Respondent, in her Motion, is of the mistaken notion
said figure was based on the statistics of the Bangko that the Court of Appeals Decision, dated 26 March
Sentral ng Pilipinas (BSP), it is also significant to note 2002, as modified by the Resolution of the same court,
that the BSP did not categorically declare that the same dated 20 November 2002, would be implemented or
constitute as an extraordinary inflation. The existence of executed together with this Court's Decision.
extraordinary inflation must be officially proclaimed by
competent authorities, and the only competent authority This Court clarifies that its affirmation of the Decision of
so far recognized by this Court to make such an official the Court of Appeals, as modified, is only to the extent
proclamation is the BSP.22 that it recognizes that petitioners had liabilities to the
respondent. However, this Court's Decision modified
Neither can this Court, by merely taking judicial notice that of the appellate court's by making its own
of the Asian currency crisis in 1997, already declare that determination of the specific liabilities of the petitioners
there had been extraordinary inflation. It should be to respondent and the amounts thereof; as well as by
recalled that the Philippines likewise experienced recognizing that respondent also had liabilities to
economic crisis in the 1980s, yet this Court did not find petitioner Citibank and the amount thereof.
that extraordinary inflation took place during the said
period so as to warrant the application of Article 1250 of Thus, for purposes of execution, the parties need only
the Civil Code. refer to the dispositive portion of this Court's Decision,
dated 16 October 2006, should it already become final
Furthermore, it is incontrovertible that Article 1250 of and executory, without any further modifications.
the Civil Code is based on equitable considerations.
Among the maxims of equity are (1) he who seeks As the last point, there is no merit in respondent's
equity must do equity, and (2) he who comes into Motion for this Court to already declare its Decision,
equity must come with clean hands. The latter is a dated 16 October 2006, final and executory. A judgment
frequently stated maxim which is also expressed in the becomes final and executory by operation of law and,
principle that he who has done inequity shall not have accordingly, the finality of the judgment becomes a fact
equity.23 Petitioner Citibank, hence, cannot invoke upon the lapse of the reglementary period without an
Article 1250 of the Civil Code because it does not come appeal or a motion for new trial or reconsideration being
to court with clean hands. The delay in the filed.25 This Court cannot arbitrarily disregard the
recovery24 by respondent of her dollar accounts with reglementary period and declare a judgment final and
Citibank-Geneva was due to the unlawful act of executory upon the mere motion of one party, for to do
petitioner Citibank in using the same to liquidate so will be a culpable violation of the right of the other
respondent's loans. Petitioner Citibank even attempted parties to due process.
to justify the off-setting or compensation of
respondent's loans using her dollar accounts with
Citibank-Geneva by the presentation of a highly IN VIEW OF THE FOREGOING, petitioners' Motion for
suspicious and irregular, and even possibly forged, Partial Reconsideration of this Court's Decision, dated 16
Declaration of Pledge. 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.
The damage caused to respondent of the deprivation of
her dollar accounts for more than two decades is
unquestionably relatively more extensive and SO ORDERED.
devastating, as compared to whatever damage
petitioner Citibank, an international banking corporation Endnotes:
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 1
Penned by Associate Justice Minita V. Chico-Nazario
thereof using respondents deposits and money market with Chief Justice Artemio V. Panganiban, Associate
placements. All this time, respondent's dollar accounts Justices Consuelo Ynares-Santiago, Ma. Alicia Austria-
are unlawfully in the possession of and are being used Martinez, and Romeo J. Callejo, concurring; rollo, Vol.
by petitioner Citibank for its business transactions. In II, pp. 1897-1898.
the meantime, respondent's businesses failed and her
properties were foreclosed because she was denied

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2
Petitioner Investors' Finance Corporation, did business such rules as the Monetary Board may promulgate.
under the name and style of FNCB Finance. As noted in These rules may include the determination of bonds and
the Decision, it is now, by virtue of a merger, doing other debt securities eligible for investment, the
business as part of its successor-in-interest, BPI Finance maturities and aggregate amount of such investment,
Corporation. However, the said petitioner shall be the maturities and aggregate amount of investment.
referred to herein as FNCB Finance, consistent with the (The General Banking Law of 2000, Section 29)
reference used in the Decision.
11
The full text of Section 8 of the General Banking Law
3
"Manila," as used herein, is descriptive of any of the of 2000 is as follows '
branches of petitioner Citibank in the Philippines, the
capital of which is the City of Manila. Respondent was SEC. 8. Organization. - The Monetary Board may
actually dealing with the branch of petitioner Citibank in authorize the organization of a bank or quasi-bank
Makati City. subject to the following conditions:

4
Penned by Judge Manuel D. Victorio, Records, Vol. III, 8.1. That the entity is a stock corporation;
pp. 1607-1621.

8.2. That its funds are obtained from the public, which
5
Penned by Associate Justice Andres B. Reyes, Jr. with shall mean twenty (20) or more persons; and
Associate Justices Conrado M. Vasquez, Jr. and Amelita
cralawl ibra ry

G. Tolentino, concurring; rollo, Vol. I, pp. 365-366.


8.3. That the minimum capital requirements prescribed
by the Monetary Board for each category of banks are
6
Penned by Associate Justice Andres B. Reyes, Jr. with satisfied.
Associate Justices Conrado M. Vasquez, Jr. and Amelita
G. Tolentino, concurring; id. at 374.
No new commercial bank shall be established within
three (3) years from the effectivity of this Act. In the
7
Exhibits "18" to "26," defendants' folder of exhibits, exercise of the authority granted herein, the Monetary
pp. 83-91. Board shall take into consideration their capability in
terms of their financial resources and technical expertise
8
Article 1279 of the Civil Code reads ' and integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership
ART. 1279. In order that compensation may be proper, structure, directors and senior management, its
it is necessary: operating plan and internal controls as well as its
projected financial condition and capital base.

(1) That each one of the obligors be bound principally,


and that he be at the same time a principal creditor of
12
See Section 75, the General Banking Law of 2000.
the other;
13
12 U.S.C.A., - 604.
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of at the same 14
6 F. 2d 762. (1925); See also Republic of China v.
kinds, and also of the same quality if the latter has been National City Bank of New York, 208 F. 2d 627 (1954).
stated;
15
104 F. Supp. 964 (1952).
(3) That the two debts are due;
16
Supra note 7.
(4) That they be liquidated and demandable;
17
BPI Credit Corp. v. Court of Appeals, G.R. No. 96755,
(5) That over neither of them there be any retention or 4 December 1991, 204 SCRA 601, 616.
controversy, commenced by third persons and
communicated in due time to the debtor. 18
See TSN, Vol. XII, 24 July 1991, pp. 30-40.

9
A universal bank shall have the authority to exercise, 19
Huibonhoa v. Court of Appeals, 378 Phil. 386, 410
in addition to the powers authorized for a commercial (1999).
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
20
396 Phil. 245, 253-255 (2000).
General Banking Law of 2000, Section 23)
21
Sangrador v. Valderrama, G.R. No. L-79552, 29
10
A commercial bank shall have, in addition to the November 1988, 168 SCRA 215, 228-229.
general powers incident to corporations, all such powers
as may be necessary to carry on the business of 22
Ramos v. Court of Appeals, G.R. No. 119872, 7 July
commercial banking, such as accepting drafts and 1997, 275 SCRA 167, 175.
issuing letters of credit; discounting and negotiating
promissory notes, drafts, bills of exchange, and other 23
Pilapil v. Garchitorena, G.R. No. 128790, 25
evidence of debt; accepting or creating demand
November 1998, 299 SCRA 343, 359; University of the
deposits; receiving other types of deposits and deposit
Philippines v. Hon. Catungal, Jr., G.R. No. 121863, 5
substitutes; buying and selling foreign exchange and May 1997, 272 SCRA 221, 237.
gold or silver bullion; acquiring marketable bonds and
other debt securities; and extending credit, subject to

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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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