CREDIT TRANSACTIONS (Atty.

Jazzie Sarona-Lozare) 1
1ST EXAM COVERAGE COMPILATION OF CASES
USURY LAW
SOLIDBANK v. PERMANENT HOMES
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171925

July 23, 2010

SOLIDBANK CORPORATION, (now Metropolitan Bank

and Trust Company), Petitioner,
vs.
PERMANENT HOMES, INCORPORATED, Respondent.

DECISION
CARPIO, J.:
G.R. No. 171925 is a petition for review1 assailing the
Decision2 promulgated on 29 June 2005 by the Court of
Appeals (appellate court) as well as the Resolution3
promulgated on 14 March 2006 in CA-G.R. CV No. 75926.
The appellate court granted the petition filed by Permanent
Homes, Incorporated (Permanent) and reversed the decision
of the Regional Trial Court of Makati City, Branch 58 (trial
court) dated 5 July 2002 in Civil Case No. 98-654. The
appellate court ordered Solidbank Corporation (Solidbank)
and Permanent to enter into an express agreement about
the applicable interest rates on Permanents loan. Solidbank
was also ordered to render an accounting of Permanents
payments, not to impose interest on interest upon
Permanents loans, and to release the remaining amount
available under Permanents omnibus credit line.
The Facts
The appellate court narrated the facts as follows:

complaint was filed against SOLIDBANK, a total of thirty six

(36) townhouse units were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it
availed of a total of 41.5 million pesos, covered by three (3)
promissory notes, which contain the following provisions,
thus:
"xxx
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I
authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment,
We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us of
the written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment."
Contrary, however, to the specific provisions as aforequoted, there was a standing agreement by the parties that
any increase or decrease in interest rates shall be subject
to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on
March 20, 1997, in the amount of 19.6 MILLION, from the
initial interest rate of 14.25% per annum (p.a.), the same
was increased 15% p.a. effective May 19, 1997; it was
again increased to 26% p.a. effective July 18, 1997. It was
thereafter reduced to 20% p.a. effective August 18, 1997,
and then increased to 24% p.a. effective September 17,
1997. The rate was increased further to 30% p.a. effective
October 17, 1997, then decreased to 27% p.a. on
November 17, 1997, and again increased to 34% p.a.
effective December 17, 1997. The rate then decreased to
30% p.a. on January 16, 1998.

The records disclose that PERMANENT HOMES is a real

estate development company, and to finance its housing
project known as the "Buena Vida Townhomes" located
within Merville Subdivision, Paraaque City, it applied and
was subsequently granted by SOLIDBANK with an "Omnibus
Line" credit facility in the total amount of SIXTY MILLION
PESOS. Of the entire loan, FIFTY NINE MILLION as [sic]
time loan for a term of up to three hundred sixty (360) days,
with interest thereon at prevailing market rates, and subject
to monthly repricing. The remaining ONE MILLION was
available for domestic bills purchase.

For the second loan availment in the amount of 18 million,

the rate was initially pegged at 15.75% p.a. on June 24,
1997. A month later, the rate increased to 23.5% p.a. It
thereafter decreased to 20% p.a. effective August 24, 1997,
but again increased to 22.5% p.a. effective September 24,
1997. For the next month, the rate surged to 30% p.a., and
decreased to 27% p.a. for the month of November. The rate
again surged to 34% p.a. for the month of December, and
was decreased to 30% p.a. from January 22, 1998 to
February 20, 1998.

To secure the aforesaid loan, PERMANENT HOMES initially

mortgaged three (3) townhouse units within the Buena Vida
project in Paraaque. At the time, however, the instant

For the third loan availment on July 15, 1997, in the amount
of 3.9 million, the interest rate was initially pegged at 35%
p.a., but this was decreased to 21% p.a. from August 14
until September 11, 1997. The rate increased slightly to
23% p.a. on September 12, 1997, and surged to 27% p.a.

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1ST EXAM COVERAGE COMPILATION OF CASES
on October 13, 1997. The rate went down slightly to 27%
p.a. for the month of November, and to 26% p.a. for the
month of December. The rate, however, again surged to
30% p.a. on January 12, 1998 before settling at 29% p.a.
for the month of February.

PERMANENT HOMES presented as witnesses Jacqueline

S. Lim, its Vice President and Chief Financial Officer, Engr.
Rey A. Romasanta, its Executive Vice President and Chief
Operating Officer, and Martha Julia Flores, its Treasury
Officer.

It is [Permanents] stand that SOLIDBANK unilaterally and

arbitrarily accelerated the interest rates without any
declared basis of such increases, of which PERMANENT
HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement that
any interest rate changes will be subject to mutual
agreement of the parties. PERMANENT HOMES further
admits that it was not able to protest such arbitrary
increases at the time they were imposed by SOLIDBANK,
for fear that SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES. Permanent was then in
the midst of the construction of its project in Merville,
Paraaque City, and SOLIDBANK knew that it was relying
substantially on the credit facility the latter extended to it.

On March 24, 1998, the trial court issued a temporary

restraining order (TRO), after a summary hearing, which
enjoined SOLIDBANK from implementing and collecting the
increases in interest rates and from initiating any action,
including the foreclosure of the mortgaged properties.

[Permanent] thus filed a case before the trial court seeking

the following: (1) the annulment of the increases in interest
rates on the loans it obtained from SOLIDBANK, on the
ground that it was violative of the principle of mutuality of
agreement of the parties, as enunciated in Article 1409 of
the New Civil Code, (2) the fixing of the interest rates at the
applicable interest rate, and (3) for the trial court to order
SOLIDBANK to make an accounting of the payments it
made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK
to release the remaining available balance of the loan it
extended to PERMANENT. In addition, [Permanent] prays
for the payment of compensatory, moral and exemplary
damages.
SOLIDBANK, on the other hand, avers that PERMANENT
HOMES has no cause of action against it, in view of the
pertinent provisions of the Omnibus Credit Line and the
promissory notes agreed to and signed by PERMANENT
HOMES. Thus, in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice,
periodically adjust the interest rates on PERMANENT
HOMES loan availments during the monthly interest
repricing dates, depending on the changes in prevailing
interest rates in the local and international capital markets.
In fact, SOLIDBANK avers that four (4) days before July 15,
1997, the Bangko Sentral ng Pilipinas (BSP) declared that it
could no longer support the Philippine currency from
external speculative forces, hence, the local currency was
allowed to seek its own exchange rate level. As a result of
the volatile exchange rate ratio, banks were then hesitant to
extend loans, and in some instances that it granted loans,
they had to ensure that they will not be at the losing end of
the deal, so to speak, by the repricing of the interest rates
every month. SOLIDBANK insists that PERMANENT
HOMES should not be allowed to renege on its contractual
obligations, as it freely and voluntarily bound itself to the
provisions of the Omnibus Credit Line and the promissory
notes.

Ms. Lims testimony centered on PERMANENT HOMES

allegations that the repricing of the interest rates was done
by SOLIDBANK without any written agreement entered into
between the parties. In fact, Ms. Lim accounted that
SOLIDBANK will merely advise them of the interest rate for
the period, after said period had already commenced, and
at times very late in the period, by fax messages. When
PERMANENT HOMES called SOLIDBANKs attention to
the seemingly surging rates it imposed on its loan,
SOLIDBANK will merely answer that it was the banks
policy, without offering any basis for such increase.
Furthermore, Ms. Lim also mentioned SOLIDBANKs
alleged practice of imposing interest on unpaid interest, at
the highest rate of 30% p.a.. Ms. Lim also presented a
tabulation, which presents the number of days their billing
statements were sent late, from the time the interest period
started. It is PERMANENT HOMES stand that since the
purpose of the billing statements was to inform them
beforehand of the applicable interest rate for the period,
the late billings will clearly show SOLIDBANKs arbitrary
imposition of the repriced interest rates, as well as its
indifference to PERMANENT HOMES plight.
To illustrate, for the first loan availment in the amount of
P19.6 million, the billing statements which should have
notified PERMANENT HOMES of the repriced interest rates
were faxed to PERMANENT HOMES between eighteen
(18) to thirty-three (33) days late. For the second loan
availment in the amount of P18 million, the faxed billings
were late between six (6) to twenty-one (21) days, and one
instance where PERMANENT HOMES received no billing
at all. For the third loan availment in the amount of P3.9
million, the faxed billings were late between seven (7) to
twenty-nine (29) days, and also an instance where
PERMANENT HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its
operations, as the completion of its construction project was
unnecessarily delayed, to its prejudice and its buyers. This
was the import of the testimony of PERMANENT HOMES
second witness, Engr. Rey A. Romasanta. According to
Engr. Rey, the target date of completion was August 1997,
but in view of the shortage of funds by reason of
SOLIDBANKs refusal for PERMANENT HOMES to make
further availments on its omnibus credit line, the project was
completed only on February 1998.

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1ST EXAM COVERAGE COMPILATION OF CASES
PERMANENT HOMES third and final witness was Martha
Julia Flores, its Treasury Officer, who explained that as
such, it was her who received the late billings from
SOLIDBANK. She would also call up SOLIDBANK to ask
what the repriced interest rate for the coming interest
period, to no avail, as SOLIDBANK will merely fax its
billings almost always, as abovementioned, late in the
period. Ms. Flores admitted that she prepared the tabulation
presented before the court, which showed how late
SOLIDBANKs billings were sent to PERMANENT HOMES,
as well as the computation of interest rates that
SOLIDBANK had allegedly overcharged on its loan, vis-avis the average of the high and the low published lending
rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone
witness, Mr. Cesar Lugtu, who testified to the effect that,
contrary to PERMANENT HOMES assertions that it was
not promptly informed of the repriced interest rates,
SOLIDBANKs officers verbally advised PERMANENT
HOMES of the repriced rates at the start of the period, and
even added that their transaction[s] were based on trust.
Aside from these allegations, however, no written
memorandum or note was presented by SOLIDBANK to
support their assertion that PERMANENT HOMES was
timely advised of the repriced interests.4
The Trial Courts Ruling
On 5 July 2002, the trial court promulgated its Decision in
favor of Solidbank. The trial court ratiocinated and ruled
thus:
It becomes crystal clear that there is sufficient proof to show
that the instant case was instituted by [Permanent] as an
after-thought and as an obvious subterfuge intended to
completely lay on the defendant the blame for the debacle
of its Buena Vida project. An afterthought because the
records of the case show that the complaint was filed in
March 16, 1998, already after it was having difficulty making
the amortization payments, the last of which being in
February 1998. A subterfuge because plaintiff, instead of
blaming itself and its own business judgment that went
sour, would rather put the blame on [Solidbank], taking
advantage of every conceivable gray area of its contract
with [Solidbank] to avoid its own liabilities. In fact, this
complaint was made the very basis for [Permanent] to
altogether stop the payment of its loan from [Solidbank]
including the interest payment (TSN, May 07, 1998, p. 60).
xxxx
WHEREFORE, finding the complaint not impressed with
merit, judgment is hereby rendered dismissing the said
complaint. The Counterclaim is likewise dismissed for lack
of evidence to support the same.
SO ORDERED.5
Permanent filed an appeal before the appellate court.

The Appellate Courts Ruling

The appellate court granted Permanents appeal, and set
aside the trial courts ruling. The appellate court not only
recognized the validity of escalation clauses, but also
underscored the necessity of a basis for the increase in
interest rates and of the principle of mutuality of contracts.
The dispositive portion of the appellate courts decision
reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is
hereby GRANTED, the assailed decision dated July 5, 2002
is REVERSED and SET ASIDE, and a new one is hereby
entered as follows:
(1) Unless the parties herein subsequently enter into an
express agreement regarding the applicable interest rates
on PERMANENT HOMES loan availments subsequent to
the initial thirty-day (30) period, the legal rate of twelve
percent (12%) per annum is hereby FIXED, to be applied
on the outstanding balance of the loan;
(2) SOLIDBANK is ordered to render an accounting of all
the payments made by PERMANENT HOMES, and in case
there is excess payment by reason of the wrongful
imposition of the repriced interest rates, to apply such
amount to the interest payment at the legal rate, and
thereafter to the outstanding principal amount;
(3) SOLIDBANK is directed not to impose penalties,
particularly interest on interest, upon PERMANENT
HOMES loan, there being no evidence that the latter was in
default on its payments;
(4) SOLIDBANK is hereby ordered to release the remaining
amount available under the omnibus credit line, subject,
however, to availability of funds on the part of SOLIDBANK.
No pronouncement as to costs.
SO ORDERED.6
The appellate court resolved to deny Solidbanks Motion for
Reconsideration for lack of merit.7
The Issues
Solidbank raised the following issues in their petition:
(A) Whether the Honorable Court of Appeals was correct in
ruling that the increases in the interest rates on
[Permanents] loans are void for having been unilaterally
imposed without basis.
(B) Whether the Honorable Court of Appeals was correct in
ordering the parties to enter into an express agreement
regarding the applicable interest rates on Permanents loan
availments subsequent to the initial thirty-day (30) period.

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1ST EXAM COVERAGE COMPILATION OF CASES
(C) Whether the Honorable Court of Appeals was correct in
ruling that [Permanent] is entitled to attorneys fees
notwithstanding the absence of bad faith or malice on the
part of [Solidbank].8
The Courts Ruling
The petition has merit.
The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the
Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January 1983.
These circulars removed the ceiling on interest rates for
secured and unsecured loans regardless of maturity. The
effect of these circulars is to allow the parties to agree on
any interest that may be charged on a loan. The virtual
repeal of the Usury Law is within the range of judicial notice
which courts are bound to take into account.9 Although
interest rates are no longer subject to a ceiling, the lender
still does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree on
the imposed rate, and such imposed rate should be in
writing.
The three promissory notes between Solidbank and
Permanent all contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I
authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment,
We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us of
the written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment.
The stipulations on interest rate repricing are valid because
(1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and (3) Permanent has
the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate. The phrases "irrevocably
authorize," "at any time" and "adjustment of the interest rate
shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent," emphasize that Permanent
should receive a written notice from Solidbank as a
condition for the adjustment of the interest rates.
In order that obligations arising from contracts may have
the force of law between the parties, there must be a
mutuality between the parties based on their essential

equality.10 A contract containing a condition which makes its

fulfillment dependent exclusively upon the uncontrolled will
of one of the contracting parties is void. 11 There was no
showing that either Solidbank or Permanent coerced each
other to enter into the loan agreements. The terms of the
Omnibus Line Agreement and the promissory notes were
mutually and freely agreed upon by the parties.
Moreover, Solidbanks range of lending rates were
consistent with "prevailing rates in the local or international
capital markets." Permanent presented a tabulation12 of the
range of Solidbanks lending rates, as reported to Bangko
Sentral ng Pilipinas and compared the lending rates with
the interest rates charged by Solidbank on Permanents
loans, thus:
XXXX
The repriced interest rates from 12 September to 21
November 1997 conformed to the range of Solidbanks
lending rates to other borrowers. The 12 December 1997 to
12 February 1998 repriced interest rates were not
unconscionably out of line with the upper range of lending
rates to other borrowers. The interest rate repricing
happened at the height of the Asian financial crises in late
1997, when banks clamped down on lendings because of
higher credit risks across industries, particularly the real
estate industry.
We also recognize that Solidbank admitted that it did not
promptly send Permanent written repriced rates, but rather
verbally advised Permanents officers over the phone at the
start of the period. Solidbank did not present any written
memorandum to support its allegation that it promptly
advised Permanent of the change in interest rates.13
Solidbank advised Permanent on the repriced interest rate
applicable for the 30-day interest period only after the
period had begun. Permanent presented a tabulation which
showed that Solidbank either did not send a billing
statement, or sent a billing statement 6 to 33 days late. 14
We reproduce the tabulation below:
XXXXX
We rule that Solidbanks computation of the interest due
from Permanent should be adjusted to take effect only upon
Permanents receipt of the written notice from
Solidbank.1avvphi1
WHEREFORE, we GRANT the petition in part. We SET
ASIDE the Decision of the Court of Appeals promulgated on
29 June 2005 as well as the Resolution promulgated on 14
March 2006 in CA-G.R. CV No. 75926 and AFFIRM the
decision of the Regional Trial Court of Makati City, Branch
58 dated 5 July 2002 in Civil Case No. 98-654 with the
MODIFICATION that the repricing of the interest rates
should take effect only upon Permanent Homes,
Incorporateds receipt of the written notice from Solidbank
Corporation of the adjustment in interest rate. The records
of this case are therefore remanded to the trial court for the

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1ST EXAM COVERAGE COMPILATION OF CASES
computation of the proper interest payments based on the
dates of receipt of written notice.
SO ORDERED.
DEPOSIT
IN GENERAL and ITS DIFFERENT KINDS
BPI v. IAC
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-66826

August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and
ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

2. Ordering defendant COMTRUST to return to the plaintiff

the amount of U.S. $3,000.00 immediately upon the finality
of this decision, without interest for the reason that the said
amount was merely held in custody for safekeeping, but
was not actually deposited with the defendant COMTRUST
because being cash currency, it cannot by law be deposited
with plaintiffs dollar account and defendant's only obligation
is to return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the
amount of P8,000.00 as damages in the concept of
litigation expenses and attorney's fees suffered by plaintiff
as a result of the failure of the defendant bank to restore to
his (plaintiffs) account the amount of U.S. $1,000.00 and to
return to him (plaintiff) the U.S. $3,000.00 cash left for
safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be
totally absolved from any liability to Zshornack. The latter
not having appealed the Court of Appeals decision, the
issues facing this Court are limited to the bank's liability with
regard to the first and second causes of action and its
liability for damages.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack
and the Commercial Bank and Trust Company of the
Philippines [hereafter referred to as "COMTRUST."] In
1980, the Bank of the Philippine Islands (hereafter referred
to as BPI absorbed COMTRUST through a corporate
merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976
by filing in the Court of First Instance of Rizal Caloocan
City a complaint against COMTRUST alleging four causes
of action. Except for the third cause of action, the CFI ruled
in favor of Zshornack. The bank appealed to the
Intermediate Appellate Court which modified the CFI
decision absolving the bank from liability on the fourth
cause of action. The pertinent portions of the judgment, as
modified, read:
IN VIEW OF THE FOREGOING, the Court renders
judgment as follows:
1. Ordering the defendant COMTRUST to restore to the
dollar savings account of plaintiff (No. 25-4109) the amount
of U.S $1,000.00 as of October 27, 1975 to earn interest
together with the remaining balance of the said account at
the rate fixed by the bank for dollar deposits under Central
Bank Circular 343;

1. We first consider the first cause of action, On the dates

material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City
Branch, a dollar savings account and a peso current
account.
On October 27, 1975, an application for a dollar draft was
accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be
charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission,
documentary stamp tax and others totalling P17.46 were to
be charged to Current Acct. No. 210465-29, again, the
current account of the Zshornacks. There was no indication
of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under
the signature of Virgilio V. Garcia, issued a check payable
to the order of Leovigilda D. Dizon in the sum of US $1,000
drawn on the Chase Manhattan Bank, New York, with an
indication that it was to be charged to Dollar Savings Acct.
No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00
from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value
of the withdrawal was given to Atty. Ernesto Zshornack, Jr.,
brother of Rizaldy, on October 27, 1975 when he (Ernesto)

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1ST EXAM COVERAGE COMPILATION OF CASES
encashed with COMTRUST a cashier's check for P8,450.00
issued by the Manila Banking Corporation payable to
Ernesto.

of the Philippines

Upon consideration of the foregoing facts, this Court finds

no reason to disturb the ruling of both the trial court and the
Appellate Court on the first cause of action. Petitioner must
be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.

December 8, 1975

In its desperate attempt to justify its act of withdrawing from

its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso
value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank
Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where
Zshornack allegedly authorized the bank to withdraw from
his dollar savings account such amount which, when
converted to pesos, would be needed to fund his peso
current account. If indeed the peso equivalent of the
amount withdrawn from the dollar account was credited to
the peso current account, why did the bank still have to pay
Ernesto?
At any rate, both explanations are unavailing. With regard
to the first explanation, petitioner bank has not shown how
the transaction involving the cashier's check is related to
the transaction involving the dollar draft in favor of Dizon
financed by the withdrawal from Rizaldy's dollar account.
The two transactions appear entirely independent of each
other. Moreover, Ernesto Zshornack, Jr., possesses a
personality distinct and separate from Rizaldy Zshornack.
Payment made to Ernesto cannot be considered payment
to Rizaldy.
As to the second explanation, even if we assume that there
was such an agreement, the evidence do not show that the
withdrawal was made pursuant to it. Instead, the record
reveals that the amount withdrawn was used to finance a
dollar draft in favor of Leovigilda D. Dizon, and not to fund
the current account of the Zshornacks. There is no proof
whatsoever that peso Current Account No. 210-465-29 was
ever credited with the peso equivalent of the US$1,000.00
withdrawn on October 27, 1975 from Dollar Savings
Account No. 25-4109.
2. As for the second cause of action, the complaint filed with
the trial court alleged that on December 8, 1975, Zshornack
entrusted to COMTRUST, thru Garcia, US $3,000.00 cash
(popularly known as greenbacks) for safekeeping, and that
the agreement was embodied in a document, a copy of
which was attached to and made part of the complaint. The
document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY

Quezon City Branch

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:
We acknowledged (sic) having received from you today the
sum of US DOLLARS: THREE THOUSAND ONLY
(US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA

It was also alleged in the complaint that despite demands,

the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was
credited to Zshornack's peso current account at prevailing
conversion rates.
It must be emphasized that COMTRUST did not deny
specifically under oath the authenticity and due execution of
the above instrument.
During trial, it was established that on December 8, 1975
Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money
on May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account
per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso
proceeds amounting to P8,350.00 were deposited to his
current account per deposit slip also accomplished by
Garcia.
Aside from asserting that the US$3,000.00 was properly
credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat
private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as
defined in Article 1962, New Civil Code), which banks do
not enter into. The bank alleges that Garcia exceeded his
powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and
the obligation is purely personal to Garcia.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 7

1ST EXAM COVERAGE COMPILATION OF CASES
Before we go into the nature of the contract entered into, an
important point which arises on the pleadings, must be
considered.
The second cause of action is based on a document
purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the
second cause of action was based on an actionable
document. It was therefore incumbent upon the bank to
specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it
desired: (1) to question the authority of Garcia to bind the
corporation; and (2) to deny its capacity to enter into such
contract. [See, E.B. Merchant v. International Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying
the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or
denying the bank's capacity to enter into the contract, was
ever filed. Hence, the bank is deemed to have admitted not
only Garcia's authority, but also the bank's power, to enter
into the contract in question.
In the past, this Court had occasion to explain the reason
behind this procedural requirement.
The reason for the rule enunciated in the foregoing
authorities will, we think, be readily appreciated. In dealing
with corporations the public at large is bound to rely to a
large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority,
any person, not having notice of want of authority, may
usually rely upon those appearances; and if it be found that
the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent
to bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have been conferred by it,
the corporation will be bound, notwithstanding the actual
authority may never have been granted
... Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently known
to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation
on the faith of the ostensible authority exercised by some of
the corporate officers. It is therefore reasonable, in a case
where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies
his authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the agent's
authority is contested; and he is given an opportunity to
adduce evidence showing either that the authority existed
or that the contract was ratified and approved. [Ramirez v.
Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646
(1918).]
Petitioner's argument must also be rejected for another
reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is
beyond corporate powers, even without the proper
allegation or proof that the corporation has not authorized

nor ratified the officer's act, is to cast corporations in so

perfect a mold that transgressions and wrongs by such
artificial beings become impossible [Bissell v. Michigan
Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a
corporation has no right to do unauthorized acts is only to
put forth a very plain truism but to say that such bodies
have no power or capacity to err is to impute to them an
excellence which does not belong to any created existence
with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to
artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the
contract binds the corporation, we now determine the
correct nature of the contract, and its legal consequences,
including its enforceability.
The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping.
The subsequent acts of the parties also show that the intent
of the parties was really for the bank to safely keep the
dollars and to return it to Zshornack at a later time, Thus,
Zshornack demanded the return of the money on May 10,
1976, or over five months later.
The above arrangement is that contract defined under
Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract.
Note that the object of the contract between Zshornack and
COMTRUST was foreign exchange. Hence, the transaction
was covered by Central Bank Circular No. 20, Restrictions
on Gold and Foreign Exchange Transactions, promulgated
on December 9, 1949, which was in force at the time the
parties entered into the transaction involved in this case.
The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all
dealings in them of whatever nature, including, where
applicable their exportation and importation, shall NOT be
effected, except with respect to deposit accounts included
in sub-paragraphs (b) and (c) of this paragraph, when such
deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or
with banks or banking institutions located in the Philippines,
including money, checks, drafts, bullions bank drafts,
deposit accounts (demand, time and savings), all debts,
indebtedness or obligations, financial brokers and
investment houses, notes, debentures, stocks, bonds,
coupons, bank acceptances, mortgages, pledges, liens or
other rights in the nature of security, expressed in foreign

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 8

1ST EXAM COVERAGE COMPILATION OF CASES
currencies, or if payable abroad, irrespective of the
currency in which they are expressed, and belonging to any
person, firm, partnership, association, branch office,
agency, company or other unincorporated body or
corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or
described in subparagraph (a) above, whether or not held
through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person,
firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation not
residing or located within the Philippines;
(c) Any and all assets existent within the Philippines
including money, checks, drafts, bullions, bank drafts, all
debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in
the nature of security expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they
are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or
other unincorporated body or corporation residing or
located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to
the Central Bank by those authorized to deal in foreign
exchange. All receipts of foreign exchange by any person,
firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation shall
be sold to the authorized agents of the Central Bank by the
recipients within one business day following the receipt of
such foreign exchange. Any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation, residing or located
within the Philippines, who acquires on and after the date of
this Circular foreign exchange shall not, unless licensed by
the Central Bank, dispose of such foreign exchange in
whole or in part, nor receive less than its full value, nor
delay taking ownership thereof except as such delay is
customary; Provided, further, That within one day upon
taking ownership, or receiving payment, of foreign
exchange the aforementioned persons and entities shall
sell such foreign exchange to designated agents of the
Central Bank.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central
Bank Circular No. 281, Regulations on Foreign Exchange,
promulgated on November 26, 1969 by limiting its coverage
to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident
person, firm, company or corporation shall be sold to
authorized agents of the Central Bank by the recipients
within one business day following the receipt of such
foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who
acquires foreign exchange shall not, unless authorized by
the Central Bank, dispose of such foreign exchange in
whole or in part, nor receive less than its full value, nor
delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon
taking ownership or receiving payment of foreign exchange
the aforementioned persons and entities shall sell such
foreign exchange to the authorized agents of the Central
Bank.
As earlier stated, the document and the subsequent acts of
the parties show that they intended the bank to safekeep
the foreign exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine resident. The
parties did not intended to sell the US dollars to the Central
Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into
at all.
Since the mere safekeeping of the greenbacks, without
selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having
been
executed
against
the
provisions
of
a
mandatory/prohibitory law. More importantly, it affords
neither of the parties a cause of action against the other.
"When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
cause of action against each other. . ." [Art. 1411, New Civil
Code.] The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the
second cause of action.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is
enjoined; and any person, firm or corporation, foreign or
domestic, who being bound to the observance thereof, or of
such other rules, regulations or directives as may hereafter
be issued in implementation of this Circular, shall fail or
refuse to comply with, or abide by, or shall violate the same,
shall be subject to the penal sanctions provided in the
Central Bank Act.

3. Lastly, we find the P8,000.00 awarded by the courts a

quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby
MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the
rate fixed by the bank for dollar savings deposits. Petitioner

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 9

1ST EXAM COVERAGE COMPILATION OF CASES
is further ordered to pay private respondent the amount of
P8,000.00 as damages. The other causes of action of
private respondent are ordered dismissed.

SO ORDERED.